Luận văn thạc sĩ UEH credit access and innovation activity in vietnamese SME

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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

CREDIT ACCESS AND INNOVATION

ACTIVITY IN VIETNAMESE SME

BY

TRƯƠNG BẢO DUY

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, JANUARY 2015

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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

CREDIT ACCESS AND INNOVATION

ACTIVITY IN VIETNAMESE SME

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

TRƯƠNG BẢO DUY

Academic Supervisor:

NGUYỄN HỮU DŨNG

HO CHI MINH CITY, JANUARY 2015

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ABSTRACT

In the wake of Vietnam banking crisis 2008-2010, there has been more focus on

access to finance for small and medium sized firms. Even though some studies has

already suggested that limit access to credit might stagnate innovative process, scarce

studies has put their focus on small firms in developing countries. For this reason, our

study is tended to reduce that gap by analyzing how credit could have affected

innovation activities of Vietnamese’s small and medium sized enterprises (SMEs)

using data between 2007 to 2011.

Our hypothesis is having access to credit allows Vietnamese SMEs aid their

innovation process. Since, it would allow them to import new machineries, upgrade

outdated production line, to cut cost, produce new products and/or improve their old

products. In this paper we uses logit models and Fixed-effect models to test the

hypothesis. Among others, logit models allow us analyzing effect of credit on firms

each year, and fixed-effect models help us take advantage of our Vietnamese SMEs

panel data sets.

This study results suggest that easing credit access increased the likelihood of

introducing new technology or applying new production line of Vietnamese SMEs.

However, the effect of credit access on other types of innovation, like introducing new

products and improving old products is inconsistent over the year, thus it needs to be

studied further.

Key words: Vietnamese SMEs, credit access, innovation

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TABLE OF CONTENTS

CHAPTER I. INTRODUCTION5

5

7

8

8

CHAPTER II. 10

10

16

21

CHAPTER III. 24

24

24

29

CHAPTER IV. 32

32

39

40

CHAPTER V. 53

53

54

REFERENCE: 56

APPENDIX: 56

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LIST OF TABLES

Table 3.1: expected sign of independent variables 27

Table 4.1: the share of Vietnamese SME by ownership category for the period 2000-2008 31

Table 4.2: the share of SMEs on total number of firms in Vietnam 33

Table 4.3: the share of SME by kind of economic activity 34

Table 4.4: SME Average share of debt 36

Table 4.5: Debt average of Vietnamese SMEs 37

Table 4.6: Average SME innovation activity 38

Table 4.7: Logit model, marginal effects - year 2007 41

Table 4.8: Logit model, marginal effects - year 2009 42

Table 4.9: Logit model, marginal effects - year 2011 43

Table 4.10: Checking for Multicollinearity 46

LIST OF FIGURES

Figure 2.1: Interest rate and expected return Error! Bookmark not defined.

Figure 2.2: Enterprise Innovation – Offensive strategy 13

Figure 2.3: Enterprise Innovation – Offensive strategy 14

Figure 3.1: Analytical Framework 23

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CHAPTER I. INTRODUCTION

For better audience experience, introduction chapter is used to state out the

causes and the range of this study. Problem statement section is used to briefly describe

theories and empirical studies behind firm innovation as well as reveal any possible

connections between credit access and innovation. It also indicates the need to conduct

this research in Vietnam as well as the research objects and the scope of the study.

They, therefor, determine the goals and the scope of this thesis.

1. Problem statement

Although firm innovation got its very first attention in the early twentieth

century via the book of Schumpeter’s book (1934), yet public and research interest is

disproportionate. Unsurprisingly, large and multinational enterprises got the most

attention from both governments and scholarships around the world. It is properly

because when it comes to innovation, we tend to think about breakthrough

technologies, which might be creating a whole new industry or dramatic changes of an

old industry. For example: internet industry or big jumps of agriculture. Innovation is

also seen as the result of heavy R&D investment which can only be done by large

enterprises. Yet, innovation is not necessarily breakthrough technologies

(Hadjimanolis, 2000). In fact, more studies and better definition (Archibugi &

Iammarino, 2002) pointed out that innovation is not large enterprises’ exclusive right,

instead it happens anywhere despite size and region through self-learning or adapting.

That opened the gateway for more recent studies toward innovation activities in small

and medium enterprises (SMEs). Nevertheless, most research around this topic (Beck

& Demirguc-Kunt, 2006; Hoffman, Parejo, Bessant, & Perren, 1998; March-Chorda,

Gunasekaran, & Lloria-Aramburo, 2002) were still conducted primarily in developed

countries, for instance in Western Europe and North American countries. Their

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contribution as a result were limited within the developed countries’ boundary. Thus,

there are many areas around this topic need to be explored.

Investigating the effect of credit access on SMEs’ innovation in developing

countries is an interesting yet challenging task. It is interesting because a clear

connection between them seems to exist. While credit is a main external financial

resource of SMEs; Innovation is an indicator of firm’s adaptation ability and sometime

growth ability, but it may require heavy investment. Yet in developing countries, credit

application process may not be transparent thus may require personal connection.

Beside a firm can use credit for multiple reasons not just innovation, for instance,

enlarging its labor force instead of investing on automatic machine. This topic is

challenging because while many studies has been done so far, they are still limited

partly because they only used data of developed countries. The reason could be due to

the nature of developing countries, data of SMEs is not collected easily. As a result, it

is difficult to measure credit access and firm’s innovation.

For this reason, our study tries to narrow that gap by investigating the link

between credit and enterprise innovation using Vietnamese SME dataset conducted by

the Central Institute for Economic Management (CIEM) of the Ministry of Planning

and Investment of Vietnam (MPI); the Institute of Labour Science and Social Affairs

(ILSSA) of the Ministry of Labour, Invalids and Social Affairs of Vietnam (MoLISA);

and the Development Economics Research Group (DERG) of the University of

Copenhagen. This dataset provides rich information about Vietnamese SME from 2005

to 2011, thus allowing us to build our panel models. We hope that our result can be

used as reference for government intervention then.

There is one more reason that urged us to do this study. There was a banking

crisis in Vietnam from 2008 to 2010 which might limit access to credit from small

firm. After the crisis, a report of Rand et al. (2012) used 2011 Vietnamese SME survey

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data implied a reduction in number of SME innovation activities. Although this might

have been an coincident and did not necessarily reflect the real connection between

those factors, since credit is just one of many barriers of firm’s innovation. Many

studies (Hall, 2005; Hoffman et al., 1998; Madrid‐Guijarro, Garcia, & Van Auken,

2009) shared the same result where it indicated that financial resource are one of the

main causes. However, it should be noticed that most of the studies were conducted

outside developing countries’ boundary therefore we do not expect our study would

share the same result.

Though there are only a small number of study investing the role of innovation

in Vietnam, this study considers it to be an important factor of firm growth for two

reasons. It is claimed to give firm a temperate absolute advantage in the market

(Schumpeter, 1934) and also increasing firm survival chance (Christiansen, 1997).

Consequently, our study finds its duty to further investigate the existence of credit

access and innovation relationship in Vietnam environment.

2. Research objects

The first step of our study was finding the best measurement for firm credit

access. This was considered as a crucial step due to the fact that credit access was

difficult to measure and there was still no broaden accept on the way to measure it.

After that we investigate to see if the firm had better credit position would have

innovated more than the firm who did not. We were also take into account difference

between high technology and low technology firms which consequently influence

decisions of the head of the enterprises on innovation. Thus, in the end we separated

the firms in our data into two groups to see how credit access had affected innovation

within each group.

In more detail, this study tries to unveil the link between credit access and SME

innovation activities and to investigate if the magnitude of that link was different

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