Luận văn thạc sĩ UEH financial development and firms’ financing constraints, a study of

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

FINANCIAL DEVELOPMENT AND FIRMS’ FINANCING CONSTRAINTS:

A STUDY OF MANUFACTURING FIRMS IN VIETNAM

BY

VU THI KHANH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, MAY 2015

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UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHIMINH CITY THE HAGUE

VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS

PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

FINANCIAL DEVELOPMENT AND FIRMS’ FINANCING CONSTRAINTS:

A STUDY OF MANUFACTURING FIRMS IN VIETNAM

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

VU THI KHANH

Academic Supervisor:

DR.LE VAN CHON

HO CHI MINH CITY, MAY 2015

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Declaration

“This is to certify that this thesis entitled “Financial development and firms’ financing

constraints: A study of manufacturing firms in Vietnam”, which is submitted by me in

fulfillment of the requirements for the degree of Master of Art in Development

Economics to the Vietnam – The Netherlands Programme (VNP).

The thesis constitutes only my original work and due supervision and

acknowledgement have been made in the text to all materials used.”

Vu Thi Khanh

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Acknowledgments

This thesis would not have been possible without the support and the

encouragement from many people. I would like to make a sincere effort in portraying

my deep sense of gratitude in the form of words.

I owe a debt of gratitude to my supervisor, Dr. Le Van Chon for his great

generosity and dedication in sharing his wisdom, stimulating my critical thinking skills

and guiding me to rethink and to deconstruct my thesis topic. He was also not afraid of

time-consuming to explain econometric methods as well as data processing techniques

to me. Moreover, he took time to diligently review my final thesis draft and help me

correct errors and inappropriate words usages. Furthermore, I am grateful to Ass.Prof

Nguyen Trong Hoai and Dr. Tran Tien Khai for their valuable comments and

suggestions for my concept note and thesis research design. Thank to Dr. Pham Khanh

Nam for his enthusiasm of helping me collecting data. I must show my gratitude

toward all lecturers VNP who have broadened my perspectives and encouraged me to

think harder and deeper about the complexity of the world’s realities.

Next, I wish to express my thank you to all my friends here at VNP. Together

we have walked and struggled through this whole treasured journey of learning and

shared memorable and priceless moments. Then, I want to say thanks to VNP officers

as well as VNP librarian for their support of comfort lab room and study materials.

Finally, I dedicate my thesis to my parents and my brother who are always

besides me and never stop supporting me.

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Abbreviations

ADB : The Asian Development Bank

BTA : The U.S.-Vietnam Bilateral Trade Agreement

DM : Demirguc-Kunt and Maksimovic

GDP : Gross domestic production

GSO : General statistics office of Vietnam

HNX : Hanoi Stock Exchange

HOSE : Ho Chi Minh Stock Exchange

IMF : The International Monetary Fund

LLY : Liquid liabilities ratio

PCG : Private credit to GDP ratio

SMEs : Small and medium enterprises

SOEs : State-owned enterprises

SVG : Stock market total valued traded to GDP

UK : The United Kingdom

UN : The United Nations

UPCoM : Unlisted public company market

US : The United States of America

VAR : Vector Autoregression

VES : The Vietnam Enterprise Survey

WB : The World Bank

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Abstract

Using panel data from the Vietnamese Enterprise Survey (VES) from 2006-

2012, this thesis aims to analyze the relationship between financial development and

financing constraints of firms in Vietnam. The Euler equation approach is applied to

model firms' investment. Investment sensitivity to cash-flow is employed as the

variable to test for the existence of financing constraints. To control for endogeneity

and firm heterogeneity, I utilize the first difference GMM estimation proposed by

Arellano and Bond (1991). There is robust evidence that Vietnamese manufacturing

firms face financing constraints and that financial development significantly relaxes

firms' dependence on internal funds for investment. In addition, although smaller firms

suffer more severe financing constraints, their constraints are alleviated more than

those of larger firms in the presence of financial development.

Keywords: Financial development, Financing constraints, Corporate Investment

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Table of contents

Chapter 1: Introduction ................................................................................................. 1

1.1 Problem statement.................................................................................................... 1

1.2 Research questions ................................................................................................... 3

1.3 The scope of the study .............................................................................................. 3

1.4 The structure of the study ......................................................................................... 3

Chapter 2: Literature review .......................................................................................... 4

2.1 Sources of investment financing. ............................................................................. 4

2.1.1 External financing ................................................................................................. 4

2.1.2 Internal financing ................................................................................................. 5

2.2 Financing constraints on firms ................................................................................. 8

2.2.1 Definition .............................................................................................................. 8

2.2.2 Measurement of financing constraints on firm ..................................................... 8

2.3 Financial development and financing constraints on firms ..................................... 9

2.4 Conclusion .............................................................................................................. 14

Chapter 3: Model specification ................................................................................... 16

3.1 Investment modeling .............................................................................................. 16

3.1.1 Euler investment equation approach ................................................................... 16

3.1.2 Detecting the presence of firm’s financing constraints using Euler equation .... 24

3.2 Financial development measurement ..................................................................... 25

3.3 Empirical model to evaluate the impact of financial development on firm

investment .................................................................................................................... 28

Chapter 4: Financial development in Vietnam ............................................................ 30

Chapter 5: Empirical results......................................................................................... 37

5.1 Data ........................................................................................................................ 37

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