Government Ownership and Firm Performance: The Case of Vietnam(*)

Ngo My TranWalter Nonneman

Ann Jorissen

March 2015

(*)Ngo, M.T, Nonneman, W., Jorissen, A. (2014) Government ownership and firm performance: The case of Vietnam, International Journal of Economics and Financial Issues, 4(3): 628-650

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Outline

• Context and rationale• Contribution• Theoretical model and propositions• Data and methodology• Empirical results• Conclusion

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Context and rationale

- The Vietnamese Government keeps a substantial stake

- Policy and scholarly debate on the effect of partial state ownership on firm performance - The extensive empirical literature is inconclusive

- Few theoretical modelling efforts on the effect of partial government ownership on firm performance

- No research for Vietnam on the effect of partial state ownership on firm performance

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Research question

Does the degree of government ownership matter for firm performance?

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Two ways of analyses

- Theoretical by extending a game theoretic model of government versus management of Huang and Xiao (2012) to derive propositions on effects of partial government ownership on firm performance.

- Empirical by estimating a dynamic econometric model (using system GMM) based on a panel of partially privatized Vietnamese firms (2004-2012) to determine the effect of the degree of government ownership on firm performance.

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Contribution

i. Expand the theoretical predictions of Huang and Xiao (2012) and provide empirical evidence for these propositions.

ii. Shedding more light on the effect of government ownership on firm performance in transition economies.

iii. Being valuable to evaluate the effects of the privatization policies of the Vietnamese government

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Theoretical model Huang and Xiao (2012)

+ Main reasoning: the net effect of the ‘helping hand’ and the ‘grabbing hand’ of government ownership in the firms

+ ‘Helping hand’: more government ownership brings, higher capital subsidy for the firm (i.e. debt guarantee, business connection...).

+ ‘Grabbing hand’: the firm’s profit will be extracted by the government, proportional to its shareholding (i.e. excessive employment (Shleifer and Vishny, 1994) excessive production (Bai et al., 1997) or resource tunneling (Johnson et al., 2000)

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A two-period Stackelberg game between the government and the firm

+ The government’s maximization problem:

Assumption: w=r=1, t=0, 0<α+β<1, c>0 and g(a)= ar

+ The manager’s maximization problem:

Assumption: w=r=1, t=0, 0<α+β<1, c>0 and b(a)= na, n>0

Theoretical model

(1)

(2)

(3)

(4)

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Propositions of Huang and Xiao (2012)

Sales per employee:

Profits per employee:

Return on sales:

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Further develop some propositions

• Proposition 1: The efficient use of labor of the firm, as measured by value added per employee, is negatively affected by government ownership

• Proposition 2: The efficient use of capital of the firm, as measured by turnaround indicator or sales over assets, is negatively affected by government ownership

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• Proposition 3: The profitability of the firm, as measured by return over assets, is negatively affected by government ownership

• Proposition 4: The profitability of the firm, as measured by return on equity, is negatively affected by government ownership

Further develop some propositions (tt)

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Data for empirical test of the model

• Panel data extracted from the annual business surveys of the Vietnamese General Statistics Office for the period 2004-2012

• Extracting those firms having some degree of state ownership (0<a<1)

• Firms with values deviating more than three standard deviations from the mean were removed.

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Variable name Definition Performance indicators ROA Return on total assets or pre-tax profit(*)/total assets ROE Return on equity or pre-tax profit/equity TURN Turnaround or sales/total assets VAEMP Value added per employee (million VND) (Value added is defined sales

minus purchases of goods and services) Characteristics AGE Age of firms mid period in the year 2012 SOLV Solvency ratio or debt/total assets LNASSET Natural logarithm of total assets State ownership Percentage of government shareholdings in the firm

Control dummy

Joint stock companies with state holding being smaller than 50 percent of total shareholding but controlling the enterprises are coded as 1, 0 otherwise.

Industry dummies Fishing, agriculture, manufacturing, electricity/gas, construction, wholesale/retailer, hotel/restaurant, science/technology, transport, financial, mining/quarrying, real estate (= reference group)

Region dummies Red river delta, Northern midlands and mountain areas, North Central coast and South Central coast, Central highlands, South East and Mekong river delta River (=reference group)

Year dummies Nine year dummies from year 2004 (=reference group) to year 2012

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Econometric models

• Pooled OLS model:

• Random effects model:

• Dynamic panel data model:

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State ownership and the percentage of government control by year

Whole sample SMEs LARGE FIRMS

No of firms

State ownership

Percentage of control

No of firms

State ownership

Percentage of control

No of firms

State ownership

Percentage of control

By year

2004 830 0.34 - 266 0.32 - 564 0.34 -

2005 1603 0.40 - 441 0.37 - 1162 0.41 -

2006 2148 0.39 0.21 512 0.35 0.18 1636 0.41 0.22

2007 2615 0.39 0.15 550 0.34 0.15 2065 0.40 0.16

2008 2814 0.39 0.17 496 0.35 0.19 2318 0.40 0.16

2009 2206 0.41 0.15 452 0.38 0.17 1754 0.42 0.14

2010 2687 0.42 0.16 308 0.40 0.21 2379 0.42 0.16

2011 2576 0.43 0.15 227 0.43 0.17 2349 0.43 0.15

2012 2367 0.43 0.15 182 0.45 0.13 2185 0.43 0.15

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The estimates of pooled models

ROA ROE VAEMP TURN

State ownership 0.04*** 0.07*** 42.73** 1.03*** (0.01) (0.02) (20.32) (0.17) Control -0.00 -0.01** -3.58 -0.11* (0.00) (0.01) (6.85) (0.06) AGE 0.00*** 0.00*** -0.94*** 0.01*** (0.00) (0.00) (0.21) (0.00) SOLV -0.11*** 0.01 -81.44*** 0.36*** (0.01) (0.01) (11.54) (0.10) LNASSET 0.00** 0.01*** 51.46*** -0.20*** (0.00) (0.00) (1.87) (0.02) Constant 0.09*** -0.00 -393.57*** 2.62*** (0.01) (0.03) (29.59) (0.25) R2 0.16 0.08 0.30 0.24 N 5,859 5,820 4,850 5,848

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The estimates of pooled models ROA ROE VAEMP TURN

State ownership -0.12* -0.37*** -449.70*** 1.20 (0.07) (0.14) (152.25) (1.26) State*LNASSET 0.01** 0.04*** 43.36*** -0.02 (0.01) (0.01) (13.29) (0.11) Control -0.00 -0.01** -4.54 -0.11* (0.00) (0.01) (6.85) (0.06) AGE 0.00*** 0.00*** -0.96*** 0.01*** (0.00) (0.00) (0.21) (0.00) SOLV -0.11*** 0.01 -81.02*** 0.36*** (0.01) (0.01) (11.53) (0.10) LNASSET -0.00 0.00 39.37*** -0.20*** (0.00) (0.00) (4.15) (0.04) (11.52) Constant 0.14*** 0.13*** -253.90*** 2.57*** (0.02) (0.05) (52.02) (0.44) R2 0.16 0.08 0.30 0.24 N 5,859 5,820 4,850 5,848

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Graph of firm performance indicators for large-, medium- and small-size firms (pooled models)

Large-size firms

Medium-size firms

Small-size firms

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

-0.05

0.05

0.1

0.15

0.2

0.25

State ownership

ROA

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2 1.4

0.05

0.1

0.15

State ownership

ROE

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2

-50

50

State ownership

VAEMP Larges-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2 1.4

-6

-4

-2

2

State ownership

TURN

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The estimates of pooled models ROA ROE VAEMP TURN

State ownership 0.73*** 0.37 488.91 -1.20 (0.26) (0.53) (575.40) (4.92) State squared -1.49*** -1.22 -1,722.63* 4.55 (0.46) (0.93) (1,024.42) (8.66) State*LNASSET -0.04* 0.01 -35.14 0.25 (0.02) (0.05) (50.60) (0.44) State squared*LNASSET 0.10** 0.04 144.36 -0.49 (0.04) (0.08) (90.51) (0.77) Control -0.00 -0.01 -3.95 -0.10* (0.00) (0.01) (6.90) (0.06) AGE 0.00*** 0.00*** -0.96*** 0.00*** (0.00) (0.00) (0.21) (0.00) SOLV -0.12*** 0.01 -81.02*** 0.36*** (0.01) (0.01) (11.56) (0.10) LNASSET 0.00 0.01 47.85*** -0.22*** (0.00) (0.01) (6.63) (0.06) Constant 0.04 0.03 -355.10*** 2.81*** (0.04) (0.07) (78.77) (0.68) R2 0.17 0.08 0.30 0.24 N 5,859 5,820 4,850 5,848

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Graph of firm performance indicators for large-, medium- and small-size firms (pooled models)

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1

0.2

0.4

0.6

0.8

1

State ownership

ROALarge-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2 1.4

0.1

0.2

0.3

0.4

State ownership

ROE

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2

200

400

600

800

State ownership

VAEMP Larges-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2 1.4

-6

-4

-2

2

State ownership

TURN

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The estimates of dynamic panel data models

ROA ROE VAEMP TURN

State ownership -0.17*** -0.28** -381.74** 0.14 (0.06) (0.14) (151.45) (0.72) State*LNASSET 0.02*** 0.03** 35.88*** 0.06 (0.01) (0.01) (13.12) (0.06) Control -0.00 -0.01 5.30 -0.03 (0.00) (0.01) (6.79) (0.03) AGE 0.00*** 0.00*** -0.54*** 0.01*** (0.00) (0.00) (0.17) (0.00) SOLV -0.09*** 0.02** -58.27*** 0.23*** (0.01) (0.01) (11.45) (0.05) LNASSET -0.01*** -0.00 18.84*** -0.24*** (0.00) (0.00) (4.12) (0.02) (0.00) (0.01) (8.84) (0.04) L.ROA 0.19*** (0.02) L.ROE 0.37*** (0.02) L.VAEMP 0.55*** (0.03) L.TURN 0.09*** (0.01) Constant 0.16*** 0.13*** -95.97* 3.25*** (0.02) (0.05) (50.05) (0.24) N 4,766 4,727 3,492 4,767

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Graphical presentation (dynamic models)

Large-size firms

Medium-size firms

Small-size firms

-5 5 10 15 20 25 30 35

-4

-2

2

4

State ownership

ROA

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1

-0.1

-0.05

0.05

0.1

0.15

0.2

State ownership

ROE

Large-size firms

Medium-size firms

Small-size firms

20 40 60 80 100 120 140 160 180

-5000

5000

10000

15000

State ownership

VAEMP

Large-size firms

Medium-size firms

Small-size firms

-5 5 10 15 20

-10

-5

5

State ownership

TURN

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The estimates of dynamic panel data models

ROA ROE VAEMP TURN

State ownership 0.54** 0.51 -356.21 -4.77* (0.25) (0.54) (568.14) (2.84) State squared -1.27*** -1.41 -37.51 9.05* (0.44) (0.94) (1,006.17) (4.95) State*LNASSET -0.04 -0.02 42.41 0.51** (0.02) (0.05) (49.74) (0.25) State squared*LNASSET 0.09** 0.08 -12.79 -0.82* (0.04) (0.08) (88.56) (0.44) Control 0.00 -0.00 6.37 -0.03 (0.00) (0.01) (6.84) (0.03) AGE 0.00*** 0.00*** -0.54*** 0.01*** (0.00) (0.00) (0.17) (0.00) SOLV -0.09*** 0.02** -59.25*** 0.23*** (0.01) (0.01) (11.48) (0.05) LNASSET 0.00 0.00 18.34*** -0.28*** (0.00) (0.01) (6.62) (0.03) L.ROA 0.19*** (0.02) L.ROE 0.37*** (0.02) L.VAEMP 0.55*** (0.03) L.TURN 0.09*** (0.01) Constant 0.08** 0.03 -100.50 3.78*** (0.03) (0.07) (77.97) (0.39) N 4,766 4,727 3,492 4,767

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Graphical presentation (dynamic models)

Large-size firms

Medium-size firms

Small-size firms

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

-0.05

0.05

0.1

0.15

0.2

0.25

State ownership

ROALarge-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1

-0.1

-0.05

0.05

0.1

0.15

0.2

0.25

0.3

State ownership

ROE

Large-size firms

Medium-size firms

Small-size firms

0.2 0.4 0.6 0.8 1 1.2

-400

-200

200

400

600

800

1000

State ownership

VAEMP

Large-size firms

Medium-size firms

Small-size firms

0.1 0.2 0.3 0.4 0.5 0.6 0.7

-3

-2

-1

1

2

State ownership

TURN

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Key findings

- Theoretical analysis based on the modified HX-model predicts negative effects of the extent of government ownership on profitability and on efficient use of capital and labor

- Empirical analysis (dynamic panel estimates):

+ Profitability and labor productivity suffers with more extensive government ownership (concurs with the theoretical predictions from the modified H-X model).

+ Yet, an extensive stake of government in large sized firms might positively affect firm performance.

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Thank you very much for your listening!Welcome all your comments!