The role of family involvement in a firm’s performance

1.2 Research objectivesThe objective of this study aims to find out how the difference, between family and family firms, in using labor and capital affects the SMEs’ output and the diffe

UNIVERSITY OF ECONOMICS

HO CHI MINH CITY VIETNAM

INSTITUTE OF SOCIAL STUDIES

THE HAGUE THE NETHERLANDS

VIETNAM –NETHERLAND PROGRAMME FOR MA IN DEVELOPMENT ECONOMICS

THE ROLE OF FAMILY INVOLVEMENT

IN A FIRM’S PERFORMANCE

Academic Supervisor: DR LE VAN CHON

Student: NGUYEN QUOC KHANH

HO CHI MINH CITY, OCTOBER 2013

Finally, I would like to express my heartfelt gratitude to my family, my friends and mycolleagues who supports, and encourage me to finish this research.

Ho Chi Minh City, October 2013

ii

This paper investigates the difference in performance between family businesses and nonfamily businesses of small and medium enterprises (SMEs) in Vietnam It focuses on thedifferences in how the use of capital and labor and in total factor productivity (TFP) between thetwo types of firms The study used statistics on small and medium enterprises in Vietnam overthe years 2005, 2007 and 2009.This paper also gives a number of policy implications for smalland medium businesses to improve their performance and for the policy-maker to support theVietnam small and medium enterprises Based on the Cobb-Douglas production function, weapply the methods OLS, GLS and panel model to estimate It finds that there are significantdifferences in the contribution of the two inputs that are labor and capital to output – the valueadded- between family businesses and non family businesses in Vietnam On labor, itscontribution to output in the family businesses was significantly higher than non-familybusinesses In terms of capital, the contribution of this factor in the family business is lowcompared to their counterparts Moreover, there are no bases to conclude which kind of firm ismore productivity

iii

TABLE OF CONTENTS

ACKNOWLEDGEMENTS………ii

ABSTRACT……… iii

TABLE OF CONTENTS……… iv

LIST OF TABLES……….vi

LIST OF FIGURES……… vii

CHAPTER I INTRODUCTION 1.1 Problem statement……….1

1.2 Research objectives……… 2

1.4 Scope of study and data………2

1.5 Thesis structure……….2

CHAPTER II LITERATURE REVIEW 2.1 What is family business? ………3

2.2 Differences between family and non-family businesses ……… 5

2.3 The performance of family and non-family firms………7

2.4 The importance of the family firm……… 13

2.5 The other determinants of firm's performance………14

2.6 Conceptual framework………15

CHAPTER III RESEARCH METHODOLOGY 3.1 The development of Domestic Private sector and Small and Medium Enterprises in Vietnam……… 16

3.2 The recent performance of Small and Medium Enterprises in Vietnam………… ………19

3.3 Sources of data……… …………20

3.4 Research methodology……… 21

3.5 Variable treatment……… 22

iv

CHAPTER IV EMPIRICAL RESULTS

4.1 Descriptive statistics……….224.2 Empirical Results ……….34

CHAPTER V CONCLUSION……… 41

REFERENCES

APPENDIX

v

LIST OF TABLES

Table 2.1: Summary of Empirical Review on the performance difference between family firms

and their counterparts……… 9

Table 3.1: Number and ownership structure of Vietnamese enterprises 2000-2008……….16

Table 3.2: Vietnamese SMEs’ share in different ownership type ……… ………… 17

Table 3.3: The number and ownership structure of Vietnamese Small and Medium Enterprises period 2000-2008……… 18

Table 3.4: Variables used in the Production Function……… 25

Table 4.1: Summary Statistic for SMEs sample (2005-2009)……… 32

Table 4.2: Correlation Table……… 33

Table 4.3: The firm production function by OLS and GLS method with homogenous input 34

Table 4.4: The firm production function by OLS and GLS method with heterogeneous input………35

Table 4.5: The firm production function estimation in pool data……….37

Table 4.6: The firm production function estimation in panel fixed-effects……… 37

Table 4.7: The firm production function estimation in panel random-effects……… 38

Table 4.8: Hausman Test for Fixed or Random Effects……… 39

vi

LIST OF FIGURES

Figure 2.1: The long-term view of family-business performance……… 7Figure 2.2: Empirical framework……… 15Figure 4.1: The probability density function histogram of variables through years

Log Value Add……….27Figure 4.2: The scatter-plot of log value add on variables of family and

non-family firms through years………28

vii

CHAPTER I INTRODUCTION1.1 Problem statement

The impact of the family involvement on the firm performance has been debated in manyresearches for a long time Many scholars have concerned the difference between family andnon-family business performance However, the results of researches are not congruent due tothe difference of the family firm definition, performance measurement or the samples So theissues about the “family effect” or “family involvement” impact on the productivity and firmperformance are continued

The role of the small and medium-sized enterprises (SMEs) is crucial in the developingeconomy for the goal of economic growth and integration like Vietnam The issuesconcerning to SMEs have received increased attention of several economists For example,CIEM (2010) investigates the characteristics of the SMEs, the government policies and thebusiness environment in Vietnam The significance of innovation for exporting of SMEs hasbeen studied by Nguyen Ngoc Anh et al (2008) In addition, Le Van Khoa (2006) considersthe environment pollution problems caused by the SMEs in the Ho Chi Minh city In 2009,the firm recognized as family firm in the total number of the SMEs in Vietnam is large thatmore than 60 percent (CIEM, 2010) However, there is lack of studies investigating thedifferences of family and non-family firms More specifically, no research on the impact ofthe family ownership on the firm productivity for the case of Vietnam has been established

In this paper, we consider how the family ownership impacts to the firm productivity inVietnam, making it different to the non-family ones

The Cobb Douglas is usually utilized to evaluate the firm output between family and family counterpart such as work by Bosworth and Londes (2002), Barth et al (2005),Martikainen (2009) that indicate ambiguous relationship To interpret to the difference, F.Barbera, K Moores (2011) argued that assuming the homogeneity of factor elasticity lead todifferent result, then two main factors in the production function-labor and capital- contribute

non-to the output differently

1

1.2 Research objectives

The objective of this study aims to find out how the difference, between family and family firms, in using labor and capital affects the SMEs’ output and the difference in thetotal factor productivity (TFP) between two types of firms In addition to this, the paper alsoexamines the other determinants that influence to the SMEs’ output and suggests somerecommendations for firms to improve their performance

non-1.3 Research question

This study tries to answer whether the family involvement has any impacts on theperformance of the small and medium sized enterprises for the case of Vietnam

1.4 Scope of study and data

Based on the production function Cobb-Douglas, this study applies the OLS and paneldata to examine the factors affecting the firms’ output The panel data is utilized to solve theheterogeneity problem and to control the omitted variables of each individual It uses the data

of small and medium enterprise surveys for the year 2005, 2007 and 2009 by the WorldInstitute for Development Economics Research, the University of Copenhagen and somegovernment agencies and bodies of Vietnam It contains the information of more than 2000SMEs concerning the characteristic of the Vietnam business environment and of the firms

1.5 Thesis structure

Following the introduction chapter, the paper is organized as followed Chapter Twogives some literature reviews and empirical studies that provide the rational for the firmperformance difference between family and non-family firms Chapter Three presents theresearch methodology Chapter Four provides the descriptive statistics and the result The lastdiscuss the conclusion and some recommendations

2

CHAPTER II LITERATURE REVIEW

This chapter by reviewing previous studies firstly provides the most frequently useddefinition of the family business Then it indicates the difference between family and non-familyfirm in using resources Next it points out the differences in performance between the two types

of firms and the importance of family businesses in the economy In addition to using theresources and family involvement that impact to the firm performance, a number of other factorsare also considered to build the conceptual framework for the next chapter

2.1 What is family business?

Recent researchers have paid much attention on the difference in performance betweenfamily and non-family firm such as Gallo, (1995); McConaughy et al., (1999); Westhead et al.,(1998) and Anderson et al., (2003) However, what is the family business? It has been thecontroversy issue for many authors to find out the clarity definition, although they have agreed

on the view that the family business involvement is the factor make the firm different fromothers (Miller & Rice, 1967) Westhead et al., (1998), reviewing and investigating previousresearches on the family firms, found that there are differences in the family definition used instudies According to Chrisman et al., (2003b), the work for family definition is continued

Diversified definitions are given basing on different methods Shanker et al., (1996) gavetwo definitions for family-firm, the narrow one concerning to the daily business and the broadone regarding to strategic decision Astrachan et al., (2002) used factors regarding to experience,power and culture to measure the influence level of family on the firm Some authors based onthe essence of the a family firm such as Davis et al , (1989); Shanker et al., (1996) to investigatethe impact of family on making decision The concept “familiness” was first introduced byHabbershon et al., (1997) concerning to the resources of a family firm that originated in thesystems of business, of family or individuals in family Habbershon et al., (2003) state that

“familiness” can bring competitive advantage to the family firm

3

According to Chrisman et al., (1999) and Chrisman et al., (2003b) , the most useddefinition for family business empirical studies is based on two significant components that areownership, management or business succession For example, the families firms are the ones thatthe ownership is concentrated by single family and/or have the influence on management process(Gallo & Svenn 1991,; Holland & Oliver 1992) So many previous have not find the convergence

on the business family definition since the difference of the type of management, control andownership lead to several definitions In addition to this, according to Chua, Chrisman & Sharma(1999), the definition based on ownership and management does not reflect the essence of familybusiness that are the firm’s vision and the intention to shape and pursue that vision of the family,small group of family or across the generation of the family

Since disadvantage of the definition regarding to the ownership and management, theother dimension is added based on the behavior perspective (Litz 1997; Daily and Dolliger1993) According to Chua, Chrisman & Sharma (1999) confirms that the behavior dimension ismore useful, give more clearly definition and better than ownership and management basement

So Chua et al (1999) give the definition that: “A family business is a business governed andmanaged with the intention to shape and pursue the vision of the business held by the dominantcoalition controlled by members of the same family in the manner that is potentially sustainableacross generations.”

Based on this approach, the significant difference between family and non-family firm isthe behavior According to the Martikainen et al (2009) and Moore (2011), the difference in thebehavior leads to the difference of utilizing the inputs such as labor and capital between familyand non-family firm Steers (1982) stated that the firm performance is determined by theefficiency of using the resources So the contributions of labor and capital to the output betweentwo kinds of firm are divergent, and the family involvement has impact in the resource input Inorder to investigate the contribution of inputs to output, the production function Cobb-Douglas isused in many studies Moore (2011) argues that assumption of the homogenous contribution ofinput factors applied in previous researches (Wall 1998; Bosworth and Loudes 2002; Barth et al.2005) seems to give controversy result, then the study assumed the factor elasticity of labor andcapital to total output are different like the work of Martikainen et al (2009) So what lead to

4

differences in using resources between two types of firms, the next section will explain thereasons by reviewing some related researches.

2.2 Differences between family and non-family businesses

The family businesses have the family goals that differ from the counterparts’ and theycomes from the “familiness” or the “family involvement”- the concept given by Habbershon etal., 1999 and Habbershon et al., 2003b According to Demsetz and Lehn (1985), the familybusiness focused on long-term horizon such as transferring to the next generation The owner ofthe family firm considers the family goal more important than pecuniary goal, comparing to theowners of non-family firm (Lee et al., 1996) The non- pecuniary objective is the significantfactor to make the decision in the family business (Stanfford et al 1999) Nicholas Kachaner etal., (2012) also pointed out that the family business focused on non-target pecuniary target likebuilding corporate culture, investment in people and maintaining the operation of businesses indifficult times Moreover, the family firms have some quite different problems relating to familythat make the resource usage different from the non-family firms (Lester et al., 2006)

The family involvement in the family- businesses brings them some competitiveadvantage that the others cannot have easily The advantages in resource acquisitions come fromthe combination of family and business factor in the family firm (Aldrich et al., 2003; Stewart,2003) Sirmon et al., (2003) stated that the “family firm capital”, that includes human, social,survivability, patient and governance structures, is different from of the counterpart in origin,salvage and usage Another advantage is the fast spread of information through members in thefamily that makes household business recognize and seize the opportunities better (Barney et al.,2002)

Reviewing the operation of the family business in the previous researches, it seems to useless capital resource than the non-family ones The family firms are not interesting in riskyinvestment then missing opportunities The family-businesses often avoid external debt andstrong dependence on the credit institutions It is found in the study by Anderson et al (2003),Villalonga and Amit (2006) The statistics of Nicolas Kachaner et.al (2012) showed that the debtproportion of the family businesses accounted for about 37% of total capital, lower than the

5

number 47% of the non-family in period 2001-2009 It also pointed out that the family business

is cautious in using of capital during good or bad period In fact, expenditures and investmentsare controlled and saved properly The study also showed that the majority of family businesses

do not fancy for receiving large projects that are not related to their core competencies Theyseem to like to expand the business in a sustainable and systematical manner rather than bet onrisky investments The risky investment aversion of the family firm was also found in theresearches of Gersicket et al (1997); Cabrera-Suárez et al (2001); Zahra (2005) and Morck et al.(2006) Le Breton- Miller et al (2006) indicated that the family firms favor the investmentdecision for long-term Gomez- Mejia et al., (2003) stated that the family firms are lessinnovative than the non-family ones

On the contrary, there is reason to speculate that family businesses are more intensive than the non-family ones The family firm has many advantages to use more intensiveand effective labor than non-family one In fact, the majority of family businesses are better ininvesting, developing and training the workforce than non-family ones Nicolas Kachaner et al.(2012) points out that family businesses spend an average of 885€ a year per employee, morethan 336 € of non-family firms In addition, workers in family businesses tend to undergotraining process that can accumulate the knowledge, experience and skills necessary to capturethe entire production process, and they can flexibly switch their work in other positions anddifferent roles within a firm (Becker 1974; Fiengener et al 1996) Moreover, in the studies ofTagiuri & Dais (1996) and Ward (1988) argue that the good working environment and culture inthe family also contribute to increasing the efficiency of employees in enterprises However,wages paid to workers in family businesses are often lower than other labor-intensive enterprises(Levering and Moskowitz 1993)

labor-All these considerations suggest that there are the differences in using resources- laborand capital- between family and non-family firm that will influence their performance The nextsection presents the differences of the performance between two types of firms

6

2.3 The performance of family and non-family firms

According to Nicolas Kachaner et.al (2012), the family businesses perform better in thelong term than other types In fact, the family firms aim to the stability and not too concentrated

in short term performance Due to risk aversion, they can ignore an opportunity of expanding thebusiness or investment during the good economic growth periods, so their performance duringthese periods may be worse However, while the economy is in crisis or in weakness gives thembrighter results The difference of their operation, the goal and their resources uses, comparing toother types of other businesses, leads them to the different results in short and long term So thefigure 2.1 gives us insight about the performance of family and non-family Firms See thebusiness results of the family businesses are relatively stable over time The average return onequity of the family business kept stably at 13% to 14% over the year In contrast, a differentsituation occurs for the non-family business firm that average return of non-family ones vibrateddramatically corresponding to the fluctuations of the GDP growth rate of the world economy Inaddition to this, the differences of their performance in specific countries were also considered

by many researches

Figure 2.1: The long-term view of family-business performance

Source: Havard Business Review 2012

Bosworth and Loundes (2002) used the data of 4354 small and medium enterprises fromAustralia in order to analyze the discretionary investment, innovation, productivity and

7

profitability It found that the businesses have the inferior performance in productivity andprofitability comparing to the non-family ones The family firms are like invest more in tangibleassets but not significantly different in R&D, intangible assets and increased training It alsoindicated that there are no significant difference in the innovation between family and non-familyfirm.

According to Barth et.al (2005), the management regime is the significant factor for lessproductivity of the family firms comparing to the non family firms This productive gap is about10% The productivity of the family firm hiring the manager from outside the owner family isnot different to the non-family firm The gap productivity is estimated about 14 % and increase

to 15-16% while analyzing only in the sub-sample of family firm This study uses the data of 438firms in the firm-level survey associated with the Norwegian Business and Industry

CIEM (2009) analyzes 2520 small and medium enterprises of Vietnam to find out thedeterminants of labor productivity It indicates that the labor productivity increases with the firmsize The firms in Ho Chi Minh are more productive than in other provinces The household orfamily firms are less productive significantly comparing to the private firm The new technologyused is found to be significant to increase the labor productivity but the relation becomesinsignificantly while estimating in the panel-data framework

Martikainen et al (2009) using the S&P 500 firm data containing 159 manufacturingfirms found that the productivity of the family firms are higher than of the non-family firms Inaddition to this, there are no differences in production technologies between two kinds of firm.The research suggests that the higher efficiency of family firms makes the difference in the totaloutput Due to the more efficiency in using input resources, the family firms have the betterperformance than the non family firms

F Barbera, K Moores (2011) utilized the data of more than 4500 businesses that are theAustralian small and medium-sized enterprise for the year 1995-1995 in order to find out thedifference between family and non-family firm on the total factor productivity (TFP) andcontribution of inputs to total output Basing on the Cobb-Douglas and assuming that elasticity

8

of two inputs, labor and capital, to the total output are divergent between family and non-family

firm, the study indicated that the contribution of labor input in the family firm is higher

significantly than in the non-family firm In contrast, the contribution of capital to the total

output in the family firms is significant lower for comparable family firms While allowing for

the heterogeneous contribution of inputs to output, there are no difference in the TFP between

family and non family firm

Galve-Górriz, C & Salas-Fumás, V (2011) studied the difference of behavior and

performance between family and non-family firms of non regulated firms in the Spanish stock

market for the period 1990-2002/2004 It found that comparing to the non-family firms the

family ones are smaller in size and have the lower average growth rate of total assets Moreover,

the family firms are less capital-intensive and higher total factor productivity than their

counterparts It also indicated that there are no differences in average profitability and financial

policies between two types of firm The author encouraged using the productive efficiency to

investigate the effect of ownership to the firms’ performance

Table 2.1: Summary of Empirical Review on the performance difference between family

firms and their counterparts

innovation andinvestment

Dependentproductivityvalue added), the profitability(proxy

valuevariables for

discretionary investment.Independent

andcharacteristicsand of the industries

Assumingelasticitiesfor both family and non-family firm

model to estimate the effect

of theproductivityDependentaddedIndependentdummy variables for familyowned

regime,firm, industry

-Probit-model, OLS and2SLS to analyze the choice

of family versus professionalmanager

-Assumingelasticitiesfor both family and non-family firm

10

CIEM -OLS and balance panel-data.

revenueemployee (regular and casualemployees)

addedemployee

Independentnumbervariables fortechnology used, ownership,sector

estimate

Dependentannual saleIndependentnumber of employees; the netannual

equipment;

binaryinvolvement

The elasticity of input tooutput is tested for differencebetween

family firm and found to beequal.

between family and family firm

capitaldummyinvolvementAssuming

of the input factor elasticitybetween two types of firm

12

After review some concerning studies, it suggests us some following hypothesis:

 H1: Ceteris paribus, the contribution to output of labor factor in family firms is higher than in non-family firms

 H2: Ceteris paribus, the contribution to output of capital factor in family firms is lower than in non-family firms

 H3: Ceteris paribus, there are no difference in the total factor productivity between in the family and non-family firms

Although there are differences in the performance between two types of business inparticular countries, the role of the family businesses is significant in the economy especially inthe developing countries The next section will highlight the importance of the family firm

2.4 The importance of the family firm

The family business plays a very important role in the economy and society especially inthe developing coutries On reviewing previous researches on family business, European studiesFamily Businesses (EFP), (2012) pointed out a number of significant contributions of familybusinesses as following They have a better performance in the long term, more contribution tothe community, more stability due to low debt and risk aversion, and the ability to create morejobs Some following impressive numbers are also given in this paper In most countries aroundthe world, the family firms contribute about 60-90% of non-state GDP, create 50-80% ofemployees in private sector, and have the proportion about 70% to 90% in total firms in theworld In the Family Business Survey (2012) of PwC named “Family Firm: A resilient model forthe 21st century” has indicated the significance of the family business in the world economy andthe indispensable role in boosting economic growth and recovery It has also pointed that if theyare received more supports from the government’s policies, their performance should changeeven more

According to Michael, P Todaro and Stephen, C Smith (2012), family businesses indeveloping country present the informal sector which use simple and labor-intensive technology.The labor is less access to education, skills training, good living and working environment andthe financial capital The productivity of enterprises in this sector is relatively lower than in theformal sector However, the informal sector plays an important role in the economy of

13

developing countries, generating more than half of the employment for the population in urbanareas.

In addition, Michael, P Todaro and Stephen, C Smith (2012) also indicate somecontributions of the informal sector for economic development in the developing countries First,despite receiving little preference policy than the formal sector, it also generates a surplus thatpromotes the development of urban economy Secondly, the informal sector is not intensivecapital, in accordance with the capital shortage of developing countries In addition, itcontributes to the formation of human resources by education and skill training with a lower costthan other sectors Moreover, the informal sector uses resources more efficiently and its ability toapply technology better Finally, because the majority of the poor are in the informal sector,promoting the economic development of this sector helps to distribute the benefits to the poor

2.5 Other determinants of a typical firm’s performance

In addition to the family involvement, there are also some factors that impact to the firm’sperformance The most significance is the location Raspe, O; Oort, F.G.van (2011) indicated thatthe knowledge externalities and the proximity influenced to the decision of firm on their locationchoice and had impact to their performance More specifically, the urban location, where there isthe intensity of universities and R&D firms, had the significant impact on the new firms’performance with the different levels based on the features and contexts of firms Andersson,Martin & Lööf, Hans(2011) found that the labor productivity of firms is impacted by the size andagglomeration of their location while controlling for several factors, then supported the positivelearning effect C Mellander, R Florida (2012) stated the geographic distribution of humancapital The intensity of universities, the service diversity and tolerance are the important factorsaffect geographic distribution of human capital M Sahin et al (2010) presented that the urbanlocation which has the multicultural entrepreneurial environment has the positive effect to firmperformance

The second is export that has the impact on the firm performance This issue was first introduced

by Krugman (1980) that exporting help firms receive gains and returns from trade, make firmsget more competitive advantages and it was explained by the concept called “ learning byexporting” Following to the work of Krugman, Bernard and Jensen (1995) found 14

that the export firms are more productive than non-export firms The significant impact ofexporting to the firm performance was also indicated in many studies such as Baldwin & Gu(2003), Blalock & Gerler (2004), Yasar & Rejesus (2005) Recently, Yong Yang (2008) hasargued that exporting effects significantly to the performance and the effect was found more inthe sample of small and medium firms than in large ones.

Moreover, several researches have indicated that the demographics characteristics of themanagement or director board have the relationship to the firm performance For example,Bilimoria and Piderit (1994a) pointed out that the ages of the directors; Bond, Glouharova &Harrigan (2010) and Singh (2007) found the educational level of the director board In addition

to this, the gender of the director or the gender ratio of the board also has the impact on the firmoutcome (Adams & Ferreria, 2009; Westphal & Stern, 2007; Nielsen & Huse, 2010)

2.6 Conceptual framework

After reviewing previous researches, I suggest the conceptual framework as the figure 2.2below In this paper analyzes the impact of "family involvement" to two inputs that are labor andcapital and to the total output In addition to labor and capital impacting to output, other factorsare also considered such as location, export, level of using machine, age, gender, etc So therecan be seen the difference in the contribution of labor and capital to total output and in theproductivity between family businesses and non-family businesses Based on this conceptualframework, the next sections will present the econometric estimate results

Figure 2.2: Empirical framework

Location,Export, age, 15 gender, etc…

CHAPTER III RESEARCH METHODOLOGY

This chapter indicates the development and the recent performance of small and mediumenterprises in Vietnam Then it presents the sources of data used for the analysis of SMEs inVietnam Based on previous studies and this data sources, the next presents the researchmethodology and variable treatment used in the econometric estimation

3.1 The development of Domestic Private Sector and Small and Medium Enterprises in Vietnam

Since the implementation of Doi Moi 1986, Vietnam has moved from centralizedeconomy to market economy Due to the impact of the new regime, there has been a structuralshift quite markedly in the types of companies The most notable is the dramatic reduction of thestate sector and the significant increase of the non-governmental sector It can be seen by looking

at Table 3.1 that shows the proportion of state sector clearly decreased about 8.5 times from13.62 % to over 1.60 % Conversely, the non-governmental companies increased significantlyand continuously from about 82% in 2000 to reach more than 95% in 2008 In addition, thebusiness of foreign investment sector is in the range of 3% over the year

Table 3.1: Number and ownership structure of Vietnamese enterprises 2000-2008

The reason for the development of the non-governmental firms is the introduction of theEnterprise Law in 2000 that has created advantage conditions for the non-state sector developingstrongly According to Vo Tri Thanh and Nguyen Tu Anh (2006), the Enterprise Law has created

a better business and investment environment for the business and a more transparent legalmechanism to ensure good relations between businesses and government The private sectorcontains mostly small and medium enterprises, seeing table 3.2 and table 3.3 Hence the stronggrowth of this sector has the significant contribution of small and medium enterprises

Through the year 2000 to 2008 the number of SMEs increased about five times, and itsratio reached to more than 97% in non-state enterprise and about 95% in total enterprises Thelast three lines in table 3.2 give the ratio of SMEs in each type of business ownership The share

of the state sector sees the reduction and at about 50% in all businesses The group of foreigninvestment SMEs is accounted for about 75% of the total Moreover, there are the significantchanges in the structure of SMEs through years Table 3.3 provides the data on the proportion ofdifferent types of ownership in the small and medium business sector Similar to general trends

of enterprises are now the apparent decline of the state sector and the astonishing rise of state sector In proportion, the state sector fell more than 10 times and the non-state sectorincreased rapidly over 1.1 times The businesses of foreign investment sector remain slightly ataround 2.5%

non-Table 3.2: Vietnamese SMEs’ share in different ownership types

18

With such strong growth like that, the small and medium enterprises have played animportant role in the economy of Vietnam Harvie (2004) and Harvie (2007) state that SMEs inthe private sector ensures stable and sustainable economic growth, creates jobs, attracts a largenumber of FDI, increase export, utilizes personal and social resources in economy, and ensuresthe rural and regional development The next part indicates the recent performance andcharacteristics of SMEs in Vietnam.

3.2 The recent performance of Small and Medium Enterprises in Vietnam

Cao Si Kiem (2012) pointed out that small and medium enterprises dominatesignificantly in the Vietnam economy They create jobs, improve income, help to develop socialresources for investment development, and reduce poverty In fact, according to the statistics ofthe General Statistics Office of Vietnam, every year it generated more than half a million newjobs, employ about 51% of the workforce and contributes 40% to national GDP After 10 yearsthe amount of taxes and fees paid from private SMEs to the government have increased by 18.4times

The recently SMEs businesses have not reached the high efficiency, and especially in thecontext of the global crisis impact Survey of CIEM (2010) on SMEs and the businessenvironment in Vietnam has launched a number of key points about the operations of SMEs asfollows Global Crisis caused disadvantage impacts to more than two thirds surveyed enterprises,and the impact is only in temporary Besides, the business environment is getting worse, and themajority of enterprises is facing financial problem and difficult to get access to loans from creditinstitutions In addition, labor productivity increases with firm size and found higher in urbanareas than in rural ones Moreover, many business activities cause the bad impacts on theenvironment, and their knowledge of the law as well as the awareness of the issues related to theenvironment are low In general, the report of CIEM (2010) concludes that issues of the financialcrisis was well prepared to confront, but there are some facing structural challenges to becompatible with the Socioeconomic Development Strategy for Vietnam for the next ten years

Cao Si Kiem (2012) pointed out some weaknesses of small and medium enterprises ofVietnam Firstly, small and medium enterprises still do not have access to the support programs

19

of government easily and effectively The reasons due to the enterprise resource constraints, lack

of preparation or not in accordance with the priority of supported sectors, lack of information, orcomplicated procedures Secondly, the business loan access is difficult due to the lendingprocedures obstacles, low or unsuitable mortgage, or high interest rate Thirdly, the space forproduction deals with the difficult access, complex procedures, not transparent information, orlarge unofficial costs Lastly, the Vietnam SMEs are located outside the global manufacturingchain, that lead to difficulties in developing industry support, or becoming providers of servicesand product inputs for foreign businesses and large state-owned enterprises

Followed by the decision number 1231/QĐ-TTg of the prime minister on September 7th2012-Approving the plan for developing medium and small enterprises 2011 – 2015, the Vietnamsmall and medium enterprises are supported from the government by 8 groups of solutions Theyare to improve the legal framework for entrances, activities and exits from the market (1);support finance and credit access, and improve the efficiency of capital use (2); support fortechnological innovation and new technologies application (3); develop human resources,focusing on capacity building for administrator (4); develop industry clusters and increase landaccess (5); provide information to support and promote to expand markets (6); buildorganizational systems to support SME development (7); and manage plan for theimplementation of SME development (8)

3.3 Sources of data

To investigate the Vietnam SMEs, this research uses the data of the small and mediumenterprise (SME) surveys, taken for every two years in 10 selected provinces of Vietnam, by theWorld Institute for Development Economics Research, the University of Copenhagen and somegovernment agencies and bodies of Vietnam It contains the information of more than 2000SMEs concerning to the characteristic of Vietnam business environment as well as of the SMEs.The 10 provinces selected in the SME survey are Hanoi, Phu Tho, Ha Tay, Hai Phong, Nghe An,Quang Nam, Khanh Hoa, Lam Dong, HCMC and Long An The data used in our research is ofthe year 2005, 2007 and 2009

20

According to the data of the surveys, the number of firms is 2800 for the year 2005; 2600for the year 2007 and 2600 for the year 2009 Extracting for the balanced panel data used in ourresearch, the number of firms is 1748 They are the firms that repeat in all three surveys and havethe sufficient information needed for analyze.

The household firms or family firms in the surveys include the registered andnonregistered firms based on the Enterprise Law of Vietnam The non-family firms embrace theprivate firms, collectives, partnerships and joint stock companies The standard for distinguishthe firm size used in the SMEs survey based on the World Bank definition The micro firm isfrom 1 to 9 employees, the small is from 10 to 49 employees and the medium is from 50 to 299employees

3.4 Research Methodology

This paper uses the concept "Total factor productivity" (TFP) to measure the productivity

of the firm, as Palia and Lichtenberg (1999) used It has the advantage that can help us measurethe labor and non-labor productivity TFP is defined by the ratio of output to weighted sum of allinputs used in the business TFP can be rewritten like as follows

A = Y/f (L, K), (1)

Where A is the TFP, Y is the actual output, f(.) is the weighted sum of all the inputs , L is

the labor input and K is the capital input Assuming that the weighted sum of inputs used isCobb-Douglas production function so

Substitute it into the two sides of the equation 1 and taking logarithms we

get Ln(Y) = Ln(A) +α ln(L) + β ln(K) (2)

To measure the contribution of input to output, this production function is usually used,

so we can investigate how labor and capital affect to the total output, the total factorproductivity as well as the impact of the family involvement, as Wall (1998); Bosworth andLoundes (2002), Barth et al 2005) F Barbera, K Moores (2011) Rewrite the equation (2) wehave:

Ln(Yi) = Ln(Aij) +α ln(Li) + β ln(Ki)

(α, β) >0; j =1,2

21

Where i present to the firm ith firm,

Y is the homogenous total output of ith firm

L is the homogenous labor input of ith firm

K is the homogenous capital input of ith firm

A is the total factor productivity

α, β are the unknown parameters that can be estimated if we have the data of output and the inputs

In the equation (3), Barbera, K Moores (2011) indicates that the contribution of the twoinputs- labor and capital- is homogenous and the only difference of family and non-family firminvolvement is explained by j in the intercept It states that the family involvement also impact tothe labor and capital, or the labor and capital contribution to the total output of family and non-family firm is different Then this study suggests the modified equation as following:

Ln(Yi) = Ln(Aij) +αj ln(Li) + βj ln(Ki) +λXi +ei

(α, β) >0; j =1,2

In the equation (4), F Barbera, K Moores (2011) shows that the contribution of labor andcapital is heterogeneous that explained by j So the difference between family and non-familyfirm in using input is estimated by observing the αj and βj. Some control variables Xi are applied

In the production function Coub-Douglass, Y is the total physical output, but the SMEssurvey does not contain the data for the output Following to the work of Kenneth Arrow (1974),Barth et al (2005) and F Barbera, K Moores (2011), the “value added” is measured by taking thevalue of production or manufactured output less total indirect cost less value of raw materialsused The value added in the economic account was collected at the end of the surveyed year

3.5 Variable treatment

The total output

In the equation 3 and 4, Y represents the total output, but in the SME survey does notcontain data on it So instead of using the total output, we use the Value Added (VA) for theproxy The Value-Add information is calculated and can be found in the Economic Account part

22

in the survey of SMEs The VA equals to “the value of production or the manufactured output”minus "the total indirect cost" minus “the value of raw material used” Following the research ofArrow, K.J (1974) and Sato (1976), using the Value-Add has the advantage of helping us toobserve and analyze the output and factor inputs regardless of tangible or intangible ones Theeconomic accounts are statistically calculated and at the end of the year.

Labor input and capital input

Used as a proxy for the labor factor, the number of total labor force at the end of the yearwas utilized This number is asked in question 73 of the survey: "What was the total work forcenumber at the end of the year." This figure includes the regular labor force (full time and parttime) and the casual the labor force Used as a proxy for capital factor, we use the sum ofphysical and financial assets at the end of the year This data can be found in the EconomicAccount part of SME survey Labor and capital inputs are expected to be positive significantlywith the total output

Family involvement

Martikainen et al (2009) and F Barbera, K Moores (2011), using the productionfunction Cobb- Douglas to estimate, found that the family involvement has the positive impact tothe total output Thus the family firms are more productive or higher TFP than non-family ones

In this study, the family involvement is based on extracting the information for the firmstructure from the question 12 about the ownership or legal status of the SMEs survey Thefamily-firms are confirmed when legal status registered by the government is Householdestablishment or business The non-family firms embrace Private or sole proprietorship ,Partnership, Collective or Cooperative , Limited liability company , Joint stock company withstate capital , Joint stock company without state capital, Joint venture with foreign capital , Stateenterprise (central) and State enterprise (local) The dummy variable is used, that equal to 1 if thefirm is household or equal to 0 if it is otherwise It is expected that the family involvement hasthe positive relationship with the total output

23

Family labour and family capital

F Barbera, K Moores (2011) stated that the there is the difference in the contribution oflabor and capital to the total output between two types of firm Two dummy variables- familylabor and family capital- that show the difference between capital and labor contribution in thetwo types of businesses, are created by multiplying the dummy variable "family involvement" totwo variables "labor input and capital input." Family labor is expected to be positively correlatedwith output, and family capital is expected to be negatively correlated with output

Control Variables

To control heterogeneity among firms, we apply some controls variables on location,machinery using level, year, exports, sex and age of the respondent For the location, eightdummy variables are used for nine provinces surveyed that are Ho Chi Minh city, Ha Noi, PhuTho, Ha Tay, Hai Phong, Nghe An, Khanh Hoa, Quang Nam, Lam Dong and Long An The firms

in Ho Chi Minh city are expected to be more productive than in other provinces

We also apply dummy variables for some industry sector There are apparel, fabricated,textile and furniture The firms in the traditional sectors of Vietnam such as apparel, textile andfurniture are expected to be more productive

Year is the number of firm’s operating year from the beginning year, taking by thesurveyed year minus the beginning year, expected to be negatively correlated to the output.Exports variable indicates that if the firm export or not, taking the value of 1 if yes and 0 ifotherwise The export firms are expected to be more productive than non-export ones

Table 3.4 below presents summary of the variables used in the regression models,definitions, units and expected signs

24

Table 3.4: Variables used in the Production Function

CHAPTER IV

EMPIRICAL RESULTS

This chapter analyzes the differences in performance between the two types ofenterprises First, it provides some descriptive statistics to get an overview of the data Then, twomethods of estimating OLS and panel data are used to examine the effects involvement family tototal output Based on results, some recommendations are suggested on Chapter V

4.1 Descriptive statistics

Figure 4.1 shows the probability distribution of the labor, capital and value-add variableover the years In general, the probability distribution functions of the variables are relativeevenly through years Table 4.1 gives us an overview of the descriptive statistics of the sampleand the two sub-samples, family and non-family firms The survey is taken every two year Ingeneral, we see that the family businesses are much more than the non-family businesses,accounted for approximately 70 percent of the total However, looking at the three variables arevalue-add, capital and labor through the years, notice that non-family businesses are larger thanthe family businesses Compared to the family business, the value added of non-family businessmore than 10 times, capital is more than about 7 to 8 times, and labor is more than about 7 times

It is found that in terms of size based on labor and capital and the value-added, the non-familybusinesses outperformed than the family business One thing to note is that over the years thenumber of employees is relatively stable In average, there are about 6 workers in familybusinesses and 35 in the non-family businesses In contrast, the 2009 statistics show that the twotypes of businesses have a critical decline in capital and value added The statistics shows thatcapital and value add decreased by 50% compared to the statistics in the previous 2 years Ingeneral, there are significant differences in using labor and capital between the two types ofenterprises The question is whether the differences that have led to the difference in the outputvalue of each type of business

Table 4.2 shows the relationship of the variables in the Cobb-Douglas function as labor,capital and value added Looking through the years, two important variables that labor and

26

capital are positively related to the output Figure 4.2 gives insight conjectures about the

relationship between the inputs to output It indicates that there are differences in the relationship

of capital and labor to output over the years between family and non-family firm To clearly see

how different, a greater detail regression estimates are applied in the next parts

Figure 4.1: The probability density function histogram of variables through years of

Log Value Add

27