Entrepreneurial Reinvestment: Local Governance, Ownership, and Financing Matter—Evidence from Vietnam

Abstract

This study investigates the relative importance of local governance and external financing on small firms' reinvestments. Using a set of more than 300,000 Vietnamese firm‐level observations from 2006 to 2015, this study finds that local governance quality is positively associated with small firms' reinvestments. However, regarding external funds, only informal finance is positively associated with reinvestments while government loans and bank loans serve as substitutes to reinvestments. Also, this study suggests that there is significant heterogeneity among ownership sectors and between micro‐enterprises and small firms in the way they value the relative importance of local governance arrangements and financing sources.

Notes

1. In Williamson’s four levels of institutional framework—informal institutions are at the highest level and include customs, traditions, and religious norms (Williamson, 2000). These are the deepest rooted and slowest to change. The second level is formal institutions; they are the “rules of the game” and constitute explicit regulations, laws, and constitutional frameworks. The third level of institution is governance, which shapes the way that individuals interact, or the “play of the game”; and the last level is resource allocation, which includes occupational choices such as entrepreneurship.

2. Appendix 1 shows all nine governance variables examined in this study. Four of them are investigated in the main text in accordance with the model proposed by Nguyen et al. (2018); the other five are analyzed in the extension section.

3. Institutional factors under the extant entrepreneurship literature are expanded far beyond Acemoglu and Johnson (2005) two‐group model of property rights (including the risk of expropriation by the government, and the ease and reliability of contract enforcement) employed by JMW and CX. Empirical studies now also utilize Scott’s (1995) three‐pillar framework of regulatory, cognitive, and normative institutional arrangements (see Stenholm, Acs, and Wuebker, 2013), as well as Williamson’s (2000) four levels of institutions (adapted from North (1990) two‐level framework) that identify informal institutions, formal institutions, governance, and resource allocation (see Estrin, Korosteleva, and Mickiewicz 2013).

4. According to Du and Mickiewicz (2016), the entrepreneurial sector consists of young, private, and small companies.

5. Source: https://www.gso.gov.vn/Default_en.aspx?tabid=515

6. According to Williamson (2000), the institutions of governance is the third level of the new institutional economics theory. This level emphasizes the governance of contractual relations—so the play of the game, rather than the rules of the game (formal and informal institutions).

7. PCI is based on a rigorous survey of the perceptions of more than 10,000 domestic firms and 1,600 foreign‐invested enterprises about local economic governance and the business environment across Vietnam. From 2013, there is an additional sub‐index, Policy Bias. For details of the items measured in each indicator, the methodology used, and data collection information please visit https://www.eng.pcivietnam.org.

8. According to the Vietnam Enterprise Law, there are four types of firms in terms of sizes. Microenterprises are firms operating with fewer than 10 employees. Small enterprises are firms having 10 to 200 employees and total registered capital of less than 20 billion VND (approximately 1 million USD). Medium enterprises are firms having 200–300 employees and total registered capital less than 100 billion VND (approximately 5 million USD). Large enterprises are firms operating with more than 300 employees and 100 billion VND registered capital. Capital is the first criterion in categorization.

9. Entrepreneurs’ private wealth investment is excluded from any informal borrowing from family, friends, relationship‐borrowing, and other semi‐formal credit providers.

10. In the survey, entrepreneurs only report the sum of profit reinvestment and additional equity investment. Therefore, we cannot calculate the net profit reinvestments. However, this does not affect the arguments of the study.

11. Details of the PCI methodology are available at https://eng.pcivietnam.org/phuong-phap-c9.html.

12. Refer to Appendix 1 for the list of local governance forces.

13. Appendix 4 shows the correlation matrix of 9 local governance variables.

14. This conclusion remains robust when we add the three external financing variables into the regression equation.

Additional information

Notes on contributors

Bach Nguyen

Bach Nguyen is Assistant Professor at Aston University, UK and a Researcher at Ton Duc Thang University, Vietnam.