The relationship between ownership and growth

Nội dung text: The relationship between ownership and growth

1. Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 47 The Relationship Between Ownership And Growth By Nguyen Minh Ha1 I. Introduction affect their growth and efficiency. With the The purpose of this paper is to theory of international operations, Hymer investigate the relationship between (1976) shows that, due to unfamiliarity ownership and employment growth. With with local environment, culture, politics, a sample of 5,461 firms and using the and economic situation, as well as the Heckman two-stage model (to eliminate need for coordination across geographic selection sample bias), the main findings distance, firms doing business abroad face are follows: Compared to firms with 100% the disadvantages of unavoidable costs. capital ownership, domestic firms with less In particular, these are related to spatial than 50% state capital, domestic private distance, and include such costs as those firms, joint stock firms without state capital, of travel, transportation, and coordination 100% foreign capital firms, and joint venture over distance and across time zones; costs (non-state and foreign) firms have positively due to unfamiliarity with local culture and significant impacts on employment growth. other sides of the local market; and costs A change in ownership is not significant to due to a shortage of information networks employment growth. or political influence in the host country. The rest of this paper is organized as Furthermore, Dunning (1974) demonstrates follows: Section 2 gives a literature review that multinational firms also confront and some previous empirical evidence. disadvantages, such as penalties exerted by Section 3 provides the econometric model the government, barriers to trade and goods, for estimating firm growth. In Section 4, and disadvantageous exchange rates. the data is described. Section 5 presents However, compared to domestic empirical results of the relationship between firms, foreign firms have several advantages ownership and growth in Vietnam. The that can translate into growth and final section gives conclusions and policy efficiency. These advantages are known implications. as the ownership-location-internalization II. Literature Review framework presented by Dunning (1977) and summarized in the boundaries of Various ownership types may have multinational enterprises and the theory of various growth rates relying on flexibility international trade by Markusen (1995). The and available resources. For firms affiliated ownership advantage could be a product or with a company, the availability of resources a production process to which other firms is higher, leading to a higher probability of do not have access (such as technology, utilising opportunities. However, large firms patents, management skills, and intangible). might have a lower probability of identifying The location advantage involves utilisation themselves due to the shortage of flexibility. of the host country in order to earn profits Meanwhile, independent firms have greater and stimulate growth (cheap factor prices, flexibility, leading to a higher probability access to customers, etc.). The internalization of identifying opportunities. Yet these firms advantage is that the product or process have a lower probability of utilising their is internally exploited (within the firm) at opportunities due to a shortage of resources transferred prices rather than achieved at (Delmar et al., 2002). arm’s length through markets. Moreover, When investing in a host country, foreign firms also take advantage of their foreign firms face disadvantages which ability to access the wider international trade ! Ho Chi Minh City Open University
2. 48 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 network (Dunning, 1974 and 1993), which firms do better than public firms, since they can be a great convenience for expansion. have large networks for providing service Hence, due to their unique advantages and support to customers. Li et al. (2007) use and disadvantages, foreign firms are data from Irish manufacturing from 1972- necessarily different from domestic firms 2003 to demonstrate that foreign plans grow both in the home country of the parent firms more than those under Irish ownership. and in the host country. These disparities However, in Gunning and Mengitae’s may lead to different growth dynamics (2001) study of Ethiopian manufacturing (Blonigen and Tomlin, 1999). firms from 1989-93, state-owned enterprises Previous empirical evidence confirms have a positive effect on firm growth. Liu and different levels of growth between foreign Hsu (2004) study Taiwan’s manufacturing and domestic firms. Almus and Nerlinger firms and show that, for basic industrial firms (1999) reveal that firms with tight links engaged in FDI toward China, state-owned to external firms (subsidiary or affiliated companies may have a negative effect on firms) have, on average, significantly higher firm growth due to a substitution effect on growth rates than firms which are entirely the firm’s domestic output. Conversely, independent on medium-tech industries and traditional industrial firms investing into non-innovative firms in other manufacturing China may experience complementary sectors. In studying new firms in East effects on their output growth. Germany after the unification of the two In the Vietnamese market, foreign Germanies, Brixy and Kohaut (1999) find firms also face the disadvantages and that firms with West German majority advantages mentioned above. However, ownership grow faster than new firms with due to a new developing country, foreign East German ownership because they have firms have faced the same problems in more funds and have greater access to know- other countries they have experienced how from the West. Chen and Ku (2000) previously. Hence, they can reduce the study the effect of foreign direct investment disadvantages and increase the advantages (FDI) on firm growth in Taiwan and indicate so as to achieve growth and efficiency that expansionary FDI (seeking to exploit within Vietnam’s market. Furthermore, the firm specific advantage: intangible the process of privatization, equitization assets in the host country) has a positive and restructuring on state firms created effect on sales growth, while defensive FDI different growth and efficiency among (seeking cheap labour in the host country to firms. Therefore, this paper will study the decrease the cost of production) is neutral effect of each ownership on employment to sales growth. Blonigen and Tomlin growth in Vietnam in recent years. (2001) analyze Japanese manufacturing III. Empirical Model of Growth plants in the US and find that Japanese- owned manufacturing plants there grow 3.1. Econometric model much faster than comparable US domestic- The firm growth (g) equation is given owned plants. According to Davidsson et al. by the econometric model as follows (2002), ownership form and legal form are g*(t;X ) = β’X + u (1.1) two of the most important elements related it it it to growth, and growth is different among when β’ is a vector of regression ownership. Analyzing growth trends in the coefficients, Xit is a vector of independent Indian computer industry for the period of variables, and uit is a zero mean, constant 1991-2002, Mishra (2004) finds that, in variance disturbance term, uit ~ Normal hardware, private Indian and private foreign (0,σ2).
3. Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 49 If the model in the equation (1.1) is failure or survival. It is the dummy variable estimated by using the pooled ordinary least (0,1), 1 indicating the surviving firm (a square (OLS) method, it produces biased and selected firm) in the study period and inconsistent estimators for the parameters 0 indicating the failure firm (a firm not in the model. Hence, we have to take selected) in the study period. This variable into consideration this potential selection is used in the Probit model to estimate the bias. The method of Heckman (1979) effect of various factors on survival. is proposed. The Heckman two-stage Explanatory variables are as follows: model undertaken for the growth equation i) Independent variables: Firms in Vietnam is adjusted by the selection equation are classified into eight types, with each type estimating probability of survival using a which represent to each ownership. They probit model, with steps as follows: First, are that Public100pc: Dummy variable, it the Probit selection model is estimated over takes 1 if the firm has 100% state capital; the entire N observations with the vector 0 if otherwise. Domestic 50pcState: Dummy term based on the likelihood). Once λit variable, it takes 1 if the domestic firm has has been obtained for each observation, less than 50% state capital; 0 if otherwise. the main equation (1.1) is estimated by StateForeignJoint: Dummy variable, it OLS over the n observations (the selected takes 1 if the firm is a joint venture between state and foreign direct capital (FDI); 0 sample) reporting values for gi by including if otherwise. Domestic100pc: Dummy the estimated inverse Mills ratio (λit) as an additional variable to obtain an additional variable, it takes 1 if the firm is a domestic coefficient,μ . More precisely, estimate: private firm; 0 if otherwise. JointStock: Dummy variable, it takes 1 if the firm is g(t;X ) = β’X + μλ + w (1.2) it it it it joint stock firm (without state capital); by OLS to obtain consistent estimates 0 if otherwise. Foreign100pc: Dummy of μ and β’. The t-test on the null hypothesis variable, it takes 1 if the firm is 100% FDI; μ = 0 is a test of σuv = 0. If a t-test indicates 0 if otherwise. DomesticForeignJoint: μ ≠ 0, then the sample selection bias is Dummy variable, it takes 1 if the firm is a given. These second stage results relating joint venture between non-state with FDI. to growth are selection - adjusted, since OwnershipChange: Dummy variable, it the procedure eliminates any bias in the takes 1 if the firm has a change in ownership estimates caused by a/the tendency for in the study period; 0 if otherwise. ii) Other unobserved characteristics which affect firm variables are initial debt and economic sector survival to be correlated with unobserved dummies (agricultural sector–AgriSector: characteristics which affect growth. firms in rural, agricultural, fishery, and 3.2. Measurement of variables forestry industries; industrial sector— InduSector: firms in mining, construction, The first dependent variable is firm and manufacturing industries; and service growth: Growth of firms can be measured in sector—ServSector) that are used as terms of employment (inputs). Firm growth instrument variables for identification in is defined as the growth model in Equation 1.1. Growth (t) = [Size(t) – Size(t-1)] / Size(t-1) IV. Data of Study where Size is employment size. Firms are drawn randomly from the Another dependent variable is a total database, so the sample for this study status variable (Censorvar) to distinguish is a random one. At year 2000, the number
4. 50 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 of randomly drawn firms is 6,000 firms and meaning that there are measured features all firms are monitored to 2005 to generate which tend to increase (decline) the exit rate a balanced panel data (i.e. 6,000 firms while simultaneously increasing (reducing) are drawn randomly at year 2000 and are firm growth. Hence, these results suggest observed in 2000, 2001, 2002, 2003, 2004, that estimations of employment growth and 2005). Thus, each firm is observed for by the OLS are inconsistent, as there is an 6 years (6 observations), and covariates are unmeasured selection effect in the sample. observed responding to each observation. Wald test is staitical significant, suggesting Each firm is monitored throughout the that the model is fitted for the research. observation period by its own tax code. State firms in Vietnam have greater This dataset does not include new entrants, advantages of exclusive utilisation of but it does include firms that exited during important industries in the economy, the study period. Hence, sample selection including gas, petroleum, electricity, coal, bias occurs with exit firms. After filtering and minerals. Furthermore, they have more unqualified firms according to these criteria, advantages of capital, as they are supported the total number of subjects is 5,461 firms. by financial sources from the government Hence, the data set for this research is a and get commitments (guarantees) balanced panel data with both time-invariant from the government about their loans. covariates and time-variant covariates. Moreover, financial institutions are state V. Empirical Results firms, too. However, the efficiency and Table 1 shows estimation results growth of state firms is not as great as by the Heckman two-step method of the expected and, at present, the government relationship between ownerships and growth is re-structuring state firms. The different in terms of employment. In estimation with proportion of state capital in the firm will the panel data, year dummies and some result in different growth. variables are used to control the differences i) For firms having a participation in the model. In order to overcome multi- in state capital, regression results show collinearity as analysed in the above that Domestic 50pcState (domestic firms that represent the economic sector and the with less than 50% state capital), and type of firm, respectively. In this research, the StateForeignJoint (joint venture firms differences in the characteristics of economic between state and foreign direct investment) sectors and initial debt are employed as the have positive coefficients, compared to instruments for estimation. Public100pc (firms with 100% state capital). In these regression results, there The coefficients of Domestic 50pcState is significant. This statistically significant. There is a positive shows that, compared to the 100% state correlation between the error disturbances firms, firms with state capital of less than of the growth and the survival models, 50% (domestic capital is larger than 50%) expressed by the positive sign of Rho (ρ), grow faster. Therefore, if the government and Lambda (λ) summarises the estimated wants state firms to grow, these firms should magnitude of the unmeasured effects on be privatized (completely or incompletely), growth. This result shows that there is to have less than 50% state capital, not more an upward bias in employment growth, than 50% or not joint venture with FDI.
5. Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 51 Reasons for explaining firms with • Domestic private firms in Vietnam less than 50% state capital grow faster than are younger and smaller than state firms. 100% state firms are as follows: Young and small firms can grow faster than • For firms with more than 50% state older and larger ones (Ha, 2010). capital, even if they are privatized and/or • In addition, in Vietnam, domestic equitized, their state capital is dominant private firms are more flexible and dynamic, within the firm’s total capital. Hence, the while state firms are cumbersome and firm structure is not changed; bureaucratic because they are influenced by • Managers are still assigned by the an old mechanism (the centrally-planned government, and they run the firm identically mechanism). Thus, domestic private firms to a state firm. Furthermore, the working are more likely to increase in size. habits and environment within the firm • Furthermore, entrepreneurs in remain the same. Subsequently, these firms domestic private firms are from the young are not different from the 100% state capital generation, whereas managers of state firms firms, except in the proportion of capital. tend to be from the older generation, which • Meanwhile, firms with less than lived and was educated in the long period of 50% state capital grow faster because the war and the centrally-planned economy. As role of government in the firm is no longer a result, these firms have an inferior level dominant. However, the role of private of entrepreneurial acumen and managerial ownership takes over; thus, these firms ability, and they do not run efficiently. are no longer run according to old routines • Another aspect is that, due to There are likely to be changes in the firm’s their firms’ capital belonging to the state, structure, as well as new entrepreneurs and managers of state firms do not bear any management who can improve the firm’s pressure of increasing efficiency or growth, efficiency and growth. so they have no incentive to expand in size. This result is consistent with Liu iii) With respect to foreign ownership, and Hsu’s (2004) study of Taiwan’s the coefficients of Foreign100pc and manufacturing firms. That is, state-owned DomesticForeignJoint appear as positive firms may have a negative effect on firm and statistically significant. These results growth due to a substitution effect on the suggest that, compared to 100% state firm’s domestic output. However, this results capital firms, foreign firms grow faster. is opposite with Gunning and Mengitae’s This is likely to explain that although (2001) study of Ethiopian manufacturing foreign firms confront disadvantages such firms as Gunning and Mengitae showed that as unfamiliarity with the environment, state-owned firms have positive effect on culture, politics, and economics of their firm growth. host country, as well as increased costs of ii) In terms of domestic private travel, transportation, and coordination over ownership, the coefficients of Domestic100pc distances and across time zones (Hymer, and JointStock are positive and statistically 1976), they nevertheless have several significant, meaning that, compared to the advantages over domestic firms. These firm with 100% state ownership, domestic advantages include ownership advantages private and joint stock firms display a (technology, patents, management skills, faster growth rate. This result is in line and intangible assets), location advantages with Mishra’s (2004) findings of computer (cheap prices of factors and access to industry in India. This result may be customers), internalization advantages (the explained by reasons as follows: product or process is exploited internally
6. 52 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 within the firm at transferring prices that This result is according to findings benefit foreign firms), and the advantage of of Blonigen and Tomlin (2001) in United access to a wider international trade network State, Chen and Ku (2000) in Taiwan, Li et (Dunning, 1977 and Markusen, 1995). al. (2007) in Irish, Liu and Hsu (2004) in These advantages promote the growth of Taiwan, and Mishra (2004) in India. foreign firms. Table 1 The Heckman two-stage model for firm growth Employment growth Explanatory Variables (*) Coefficients Std.Errors Constant -0.0024 0.1913 Domestic 50pcState 0.1573 0.0256 StateForeignJoint 0.0986 0.0649 Domestic100pc 0.0742 0.0237 JointStock 0.1409 0.0637 Foreign100pc 0.1787 0.0583 DomesticForeignJoint 0.1624* 0.0848 Ownership Change -0.0506 0.0340 Probit Function ( ) Constant -0.1363 0.1127 Vairables of the identifying restrictions: Initial debt 0.1191 0.0312 Industrial Sector 0.4681 0.0940 Service Sector 0.4800 0.0938 Rho 0.589 Lambda 0.4716 0.1710 No. Obs 21,102 Censored Obs (Uncensored Obs) 7,617 (13,485) Wald test χ2 = 671.9 Pro > χ2 = 0.0000 Note: (*) Control Variables for Growth function: Lnage, LnageSq, Lnsize, Capintensity, Salelabor, EBTlabor, ROS (returns on sales), ROA (returns on assets), LagLeverage, Investment, Year dummy. ( ) Control Variables for Survival function: Lnsize, Lnassets, Capintensity, DomesticFirms, ForeignFirms, Salelabor, EBTlabor, ROS (returns on sales), ROA (returns on assets), Leverage, Year dummy. The reference groups for dummies are Public100pc and AgriSector. is significant at 1%, is significant at 5%, and * is significant at 10%. VI. Conclusion Compared to firms with 100% capital 6.1. Conclusion ownership, domestic firms with less than 50% state capital and domestic private firms In this paper, the Heckman two-stage grow faster in the employment. In addition, model is employed to eliminate the sample selection bias in the sample in order to joint stock firms without state capital, 100% estimate firm growth. Principal findings are foreign capital firms, and joint venture (non- as follows: state and foreign) firms have positively significant impacts on employment growth. It is important to conduct the two- A change in ownership is not significant to stage procedure to correct selection bias employment growth. in estimating growth because there is a presence of significant selection effects in 6.2. Policy implications the sample that the estimation of growth by This paper may have some value for the OLS approach may be inconsistent. The practitioners for both managers and the coefficient of the inverse Mills ratio (Lambda) government because micro- and macro- is negative and statistically significant in the level policies will increase/decrease firm employment growth model. growth. From the above empirical results
7. Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 53 of the relationship between ownership on Firm Growth: The Case of Taiwan’s and growth, some policy implications are Manufacturers’, Japan and the World drawn that can be introduced into Vietnam’s Economy, 12, pp.153-172. situation as follows: Davidsson, P. Kirchhoff, B., Hatemi-J, Compared to firms with 100% state A. and Gustavsson, H. (2002), capital ownership, domestic private ‘Empirical Analysis of Business ownership grows faster in terms of Growth Factors Using Swedish employment, so assistant programmes Data’, Journal of Small Business and policies of stimulating domestic Management, 40(4), pp. 332-349. private ownership to start-up and grow Delmar, F., Davidsson, P. and Gartner, W. B. should be issued. (2003), ‘Arriving at the High – Growth The process of privatizing state firms Firm’, Journal of business Venturing, helps these firms to grow. However, if the 18, pp.189 – 216. government wants state firms to grow, these Dunning, J. H. (1974), ‘The Distinctive state firms should be privatized completely Nature of the Multinational Enterprise’, or incompletely—with state capital in Dunning, J. H., Economic Analysis being less than 50% of the total capital. and the Multinational Enterprise, Moreover, a decrease and/or deletion George Allen & Unwin Ltd, 1974. of direct and indirect support from the ___ (1977), ‘Trade, Location government should be instituted for state of Economic Activity and MNE: A firms (compared to in previous periods) Search for an Eclectic Approach’, to generate equal business environment in Olhlin, B., Hesselborn, P. O. and across ownerships. Wijkman, P. M. ‘The International Assistant programmes and policies of Allocation of Economic Activity. encouraging other ownerships (joint venture, London: Macmillan, 1997. joint stock, and foreign direct investment) ___ (1993), ‘Multinational are also issued, since they experience higher Enterprises and the Global Economy’, growth rates in employment compared to Addison – Wesley Publishing firms with 100% state capital. Company Inc., 1993. VII. References Gunning, J. W. and Mengistae, T. Almus, M. and Nerlinger, E. A. (1999), (2001), ‘Determinants of African ‘Growth of New Technology – Based Manufacturing Investment: The Firms: Which Factors Matter?’, Small Microeconomic Evidence’, Journal Business Economics, 13, pp.141-154. of African Economies, Vol. 10, AERC Blonigen, B. A. and Tomlin, K. (2001), Supplement, 2, pp. 48-80. ‘Size and Growth of Japanese Plants Heckman, J. J. (1979), ‘Sample Selection Bias in the United States’, International as a Specification Error’,Econometrica , Journal of Industrial Organization, Vol. 47, No. 1, pp. 153-161. 19, pp.931-952. Hymer, S. and Pashigian, P. (1962), ‘Firm Brixy, U. and Kohaut, S. (1999), Size and Rate of Growth’, ‘The ‘Employment Growth Determinants in Journal of Political Economy, Vol. 70, New Firms in Eastern Germany’, Small No. 6, pp 556-569 Business Economics, 13, pp.155-170. Hymer, S. H. (1976), ‘The International Chen, T. J. and Ku, Y. H. (2000), ‘The Operations of National Firms: A Effect of Foreign Direct Investment Study of Direct Foreign Investment’,
8. 54 Ho Chi Minh City Open University Journal of science- No. 1(1) 2011 The Massachusetts Institute of Markusen, J. R. (1995), ‘The Boundaries of Technology, 1976. Multinational Enterprises and the Theory Li, Q., Walsh, P. P. and Whelan, C. (2007), of International Trade’, Journal of Economic Perspectives, Vol 9, No. 2, pp. ‘Jobless Growth through Creative 169-189. Destruction: Ireland’s Industrial Development Path 1972-2003’, in Mishra, V. (2004), ‘Size, Age & Firm Growth: The Computer Industry in India’, It is Unpublished paper in Seminar on ‘The downloadable from Survival and Growth of Firms’ at the abstract=520822 or Centrer for Economic Performance, intradoc/groups/public/documents/ LSE, London, 2007. APCITY/UNPAN023828.pdf Liu, W. C. and Hsu, C. M. (2004), ‘Financial Ha, Nguyen Minh (2010) “Impact of Age Structure, Corporate Finance, and and Size on Firm Growth in Vietnam”. Growth of Taiwan’s Manufacturing Science Journal of HCMC Open Firms’, It is downloadable from http:// University. Vol 2 (17), pp.137-146. faculty.washington.edu/karyiu/confer/ tok04/papers/liu&hsu.pdf