The impact of ownership structure and capital structure on firm performance of privatized state owned enterprises in vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP
STRUCTURE AND CAPITAL
STRUCTURE ON FIRM
PERFORMANCE OF PRIVATIZED
STATE-OWNED ENTERPRISES IN
VIETNAM

MASTER OF BUSINESS ADMINISTRATION

Ho Chi Minh City – Year 2018


UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

Le Phuoc Quyen Anh

THE IMPACT OF OWNERSHIP
STRUCTURE AND CAPITAL
STRUCTURE ON FIRM
PERFORMANCE OF PRIVATIZED
STATE-OWNED ENTERPRISES IN
VIETNAM

MASTER OF BUSINESS ADMINISTRATION

SUPERVISOR: CAO HAO THI, Ph.D

Ho Chi Minh City – Year 2018


ACKNOWLEDGEMENT
First of all, I would like to express my gratitude to all those who gave me the possibility to
complete this thesis.
I am deeply indebted to my supervisor Ph.D. Cao Hao Thi, whose helping, guidance,
stimulating suggestions and encouragement he gave me in all the time of researching and
writing this thesis.
I also want to express my thankfulness to committee members, Ph.D. Tran Ha Minh Quan
and Ph.D. Nguyen Dinh Tho for their encouragements and comments. Besides, I express my
appreciation to Ms. Phan Dang Bao Anh for your great support and all of my friends in Mbus
4.1 for the time we spent together.
And last but not least, I send all my gratefulness my family for all their external love and
supports. Especially, I want to say thank you so much to my boyfriend who always takes care
of and supports me all the time. I love you.

i


Table of Contents
LIST OF TABLES .................................................................................................................iiv
LIST OF FIGURES .................................................................................................................. v
ABBREVIATION ...................................................................................................................vi
ABSTRACT ...........................................................................................................................vii
Chapter 1 Introduction ............................................................................................................. 1

1.1 Research background ..............................................................................................1
1.2 Problem statement ...................................................................................................4
1.3 Research objectives .................................................................................................5
1.4 Research questions ..................................................................................................6
1.5 Research scope ........................................................................................................6
1.6 Research contribution .............................................................................................6
1.7 Research structure ...................................................................................................7
Chapter 2 Literature Review ................................................................................................... 9
2.1 Privatization ............................................................................................................9
2.1.1 Definition of privatization ................................................................................ 9
2.1.2 Objectives of privatization ............................................................................. 11
2.2 Privatization in Vietnam .......................................................................................12
2.3 Effects of ownership structure on firm performance ............................................17
2.3.1 Effects of State ownership on firm performance ............................................ 18
2.3.2 Effects of private ownership on firm performance ........................................ 19
2.4 Effects of capital structure on firm performance ..................................................20
2.5 Effects of firm size as moderating firm performance ...........................................21
2.6 Summary of literature reviews ..............................................................................21
2.7 Hypotheses ............................................................................................................22
2.8 Research models ...................................................................................................23
Chapter 3 Research Methodology ......................................................................................... 25
3.1 Research process ...................................................................................................25
3.2 Data collection ......................................................................................................26
ii


LIST OF TABLES

Table 1

Number of Vietnam SOEs being privatized from 1992 to 2015 .......................... 14

Table 2

Vietnamese privatized SOEs with foreign ownership of around 49% ................. 15

Table 3

Sample size ........................................................................................................... 28

Table 4

Description of variables ........................................................................................ 33

Table 5

Descriptive statistics ............................................................................................. 35

Table 6

Level of Debt to Equity ........................................................................................ 35

Table 7

Correlation analysis .............................................................................................. 36

Table 8

Regression result of relationship between D/E and firm performance ................. 37

Table 9

Regression result of relationship between PDO and firm performance ............... 38

Table 10 Regression result of relationship between SDO and firm performance ............... 39
Table 11 Regression result of relationship between firm performance and D/E independent
from PDO .............................................................................................................. 40
Table 12 Regression result of moderating effect of private-dominant ownership on
relationship of D/E and firm performance ............................................................ 41
Table 13 Regression result of relationship between firm performance and D/E independent
from SDO .............................................................................................................. 42
Table 14 Regression result moderating effect of State-dominant ownership on relationship
of D/E and firm performance ................................................................................ 42

iv


3.2.1 Population ....................................................................................................... 26
3.2.2 Sample ............................................................................................................ 27
3.2.3 Data collection procedure ............................................................................... 28
3.3 Data analysis method ............................................................................................29
3.3.1 Regression analysis ........................................................................................ 29
3.4 Variables ...............................................................................................................30
3.4.1 Dependent variables ....................................................................................... 30
3.4.2 Independent variables ..................................................................................... 31
3.4.3 Control variables............................................................................................. 31
3.5 Summary of methodology ....................................................................................32
Chapter 4 Data Analysis ........................................................................................................ 34
4.1 Descriptive analysis ..............................................................................................34
4.1.1 Descriptive analysis ........................................................................................ 34

4.1.2 Correlation analysis ........................................................................................ 35
4.2 Regression analysis ...............................................................................................36
4.2.1 Result of relationship between capital structure and firm performance ......... 36
4.2.2 Result of relationship between dominant ownership structure and firm
performance .................................................................................................... 37
4.2.3 Result of the moderating effect of dominant ownership on relationship of D/E
and firm performance ..................................................................................... 39
Chapter 5 Conclusion and implication .................................................................................. 44
5.1 Conclusion ............................................................................................................44
5.2 Implication ............................................................................................................45
5.3 Future research ......................................................................................................45
REFERENCES ....................................................................................................................... 46
APPENDIX A List of privatized SOEs.................................................................................. 52
APPENDIX B Data Analysis Result ...................................................................................... 61

iii


LIST OF FIGURES

Figure 1

Vietnamese’s SOEs reform, period 2009-2013 ...................................................... 2

Figure 2

Vietnam Public Debt to GDP ratio (2006- 2015) ................................................... 3

Figure 3

Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021) ...... 3

Figure 4

Choices of ownership privatization ...................................................................... 11

Figure 5

Conceptual model ................................................................................................. 23

Figure 6

Moderated model .................................................................................................. 24

Figure 7

Research process ................................................................................................... 26

Figure 8

Data collection procedure ..................................................................................... 28

v


ABBREVIATION

Abbreviation

Meaning

ADB

Asian Development

D/E

Debt to Equity

et al.

Et alia

etc.

Et cetera

GDP

Gross Domestic Product

HNX

Hanoi Stock Exchange

HSX

Ho Chi Minh Stock Exchange

IPO

Initial public offering

PDO

Private-dominant ownership

SCIC

State Capital and Investment Corporation

SDO

State-dominant ownership

SOEs

State-owned enterprises

USD

United States Dollar (currency of The United States of America)

WTO

World Trade Organization

vi

ABSTRACT

Privatization of Vietnamese State-owned enterprises is an interesting case in terms of
economic development. This study conducts an empirical evidence of privatization and its
effects on firm performance. It examines the performance of current privatized SOEs in
Vietnam listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange. The study
collects the official published information of sampled privatized firms to analyze the
relationship between ownership structure, capital structure and firm performance. Based on
the result, capital structure is confirmed to have negative effect on performance of privatized
firms. In addition, the study also found that State-dominant ownership is positively influenced
firm performance, but in contrast to expectation, private-dominant ownership is negatively
affected performance. Regarding to the moderating role of dominant ownership structure on
the adverse effect of relationship between capital structure and firm performance, privatedominant ownership results a positive effect while there is no evidence to refute the Statedominant ownership’s impact on this relationship. The data collection generally shows an
overall picture of current State shares which State shall still control most of large privatized
companies. Finally, based on the theoretical analysis and empirical results and existing status
of Vietnam’s economy, the study provides some beneficial opinions and recommendations
for future researches.

vii


Chapter 1

Introduction

1.1 Research background
In recent years, privatization in developing countries has been accelerated to meet the
requirement of socioeconomic development. For a developing country as Vietnam, the
privatization is becoming more and more important in reformation process and considered as
an essential engine for transformation of State-owned enterprises (SOEs) in the period of the

country’s economy on going to integrate with the world economy.
After Vietnam had been the official member of World Trade Organization (WTO) in 2007,
it was necessary to establish a capital mobilization regime suitable with market mechanism
and international practices to invest for developing socioeconomic in general. As witnessed
an economic could not strongly develop in long time if it still depended on the revenue of
SOEs, Vietnam Government has to considered privatization of SOEs as a mean of solving
this problem and bringing steadily economic development to the country. According to Asian
Development Bank’s paper (2015), Vietnamese SOEs’ production was lower levels of output
than private sector competitors’, influencing on economic growth. Figure 1 describes the net
turnover as percentage long-term investment of Vietnamese enterprises in period 2009-2013,
showing that State-owned remaining low net turnover compared to private-domestic and
private-foreign. Moreover, in competitive markets, State ownership may be less desirable to
private ownership for these reasons: (1) the State’s priorities focus on social and political
goals opposed to maximization of firm value; (2) human resource for management/leader
position is from political allies rather than experienced staff; and (3) higher transaction cost
(Hess, Gunasekarage & Hovey, 2010).
Before 1986, Vietnam had a centralized-planning economy, which had only two types of
firm ownership in the economy including State and collective enterprises (Tran, Nonneman
& Jorissen, 2015). Under central planning system, the government controlled and allocated
social properties. It led to a weak market mechanism because it distorted the prices of product
and services of the economy. Since 1992, the “reform” (known as “Doi moi”) program was
launched by Vietnam Government with the main purpose of improvement on the firm
1


performance of SOEs. Vietnam economy was changed from centralized to market based
economy through privatization. Compared to most other economies, economic growth of
Vietnam is still considered stable, which is not required a breakout in privatization. Hence,
privatization process has been taking place slowly and gradually in Vietnam, from small SOEs
to bigger ones.

Figure 1 Vietnamese’s SOEs reform, period 2009-2013
Source: Asian Development Bank, 2015

The primary objective of restructuring Vietnamese SOEs is to enhance the socio-economic
efficiency, thus to loosen the financial burden on the government, and to concentrate scarce
resources to those SOEs that need investment (Yuen, Freeman & Huynh, 1996). In recent
years, public and publicly guaranteed debt to GDP in Vietnam has considerably increased to
the ceiling (Figure 2). At now, Vietnam Government is carrying a burden public debt to gross
domestic product (GDP) ratio, which public debt was around 61.3% of GDP at the end of
2015 and continuously increasing. Public debt ratio is considered growing three times faster
than GDP, reflecting persistently high budget deficits and lower-than-projected nominal GDP
(International Monetary Fund, 2016). This ratio is predicted to rise toward 70% in 2018 and
only start to decrease from 2020 (Figure 3). The slow progress of SOEs privatization is
considered as one of the factors affecting the distribution of the country’s financial resources.
Therefore, Government are in hurry motivated to complete the privatization process and even

2


plan to sell stakes at many large companies at now. However, to restructure or privatize SOEs
may also require public funds.
Vietnam Public Debt to GDP (2006-2015)

(%)
70

61.3

60

49.95

50
40

34.8

36

38.4

38.3

54.98

50.5

37.9

31.9

30
20
10
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

Public debt/GDP ratio (%)

Figure 2 Vietnam Public Debt to GDP ratio (2006- 2015)
Source: Data from Ministry of Finance

Figure 3 Predicted public and publicly-guaranteed debt ratio in Vietnam (2015-2021)
Source: International Monetary Fund (2016)

Regarding to the performance of SOEs, there are many corporates that keep the former
corporate governance, old management methods, inefficient working environment, etc. after
privatized. Besides, the management mechanism and policy such as wage policy, bonus and
so on are still applied as before the privatization. In 2013, Vietnam Government issued the
3


Decree No.189/2013/ND-CP and hoped it will decrease the issues such as corporate value,
debt settlement, etc. will be quickly solved to accelerate the privatization process. In fact,
there are many SOEs after being privatized are far more efficient in Vietnam, some has been
bankrupted or dissolved since they lost the guarantee from State and lack of competitive
capabilities. In addition, the failure of many privatizations may come from the ignorance of
the issue of corporate governance as well as the organizational capital. In Vietnam context,
Government is still a dominant supermajority shareholder in many privatized firms, so that
privatized SOEs still depend on State’s control and fail to make decision by themselves, which
is likely to bring some disadvantages in management that the leaders could not have their
power as the initial purpose of privatization.
1.2 Problem statement
In form of a State-owned enterprise, ownership is fully on the hands of the State and firm
assets are managed by public sector and civil servants (Tran et al., 2015). However,
privatization of SOEs leads to the establishment of various forms of ownership structures.
According to Tsegba and Ezi-Herbert (2011), ownership structure includes dominant

shareholder, concentrated ownership, insider ownership, foreign ownership institutional
ownership, and government ownership. Among which, dominant shareholders is the most
influence variable since they take dominantly control of company’s business. According to
Wattanakul (2002), the ownership transformation may divide into two cases: full privatization
and partial privatization. In partial privatization, it can be subdivided into State-dominant
ownership and private-dominant ownership.
Previous studies showed some arguments about the State ownership. Musallam (2015)
researched and stated that privatized firms with high State ownership could have strong
government protection and government mechanism, thus, they easily perform better.
Otherwise, some studies stated that privatized firms could not focus on profit maximization
because State has different purposes, especially inclined political, and that lead to lower firm
performance because of weaker corporate governance arrangements. On the other hand,
previous studies resulted that private ownership was positively related to corporate
4


performance since private shareholders might focus on maximizing firm performance by
providing a stronger governance, better supervision, controlling, investments and balance on
management discretion. Therefore, it raises a key question is whether the dominant ownership
structure may influence firm performance of privatized SOEs.
Accordingly, considering case of transformation of SOEs is the follow of restructuring of
capital structure. Adewale and Ajibola (2013) stated that firms received direction and
orientation concerning their business activities with capital structure; and through
privatization, it becomes more important in the developing countries. Dharwadkar, George
and Brandes (2000) specified that debt mechanism would carried out effectively in the strong
governance context of developed countries. However, this solution would not work in
emerging economics, such as Vietnam, where legal system is not clearly and stable and
corporate information is not transparent. Therefore, it is expected that firms with low Debt to
Equity ratio could show a better performance in Vietnam.
In brief, this study will focus on the examining the effects of ownership structure (Statedominant ownership and private-dominant ownership) and capital structure (Debt to Equity

ratio) on firm performance of privatized SOEs in Vietnam. Furthermore, the study also
examines the moderating effects of these two dominant ownership structure on the
relationship of capital structure and firm performance.
1.3 Research objectives
The research is conducted with privatized SOEs. The purpose of this research is to study
the privatization process in Vietnam, in which the substantial objective is to investigate the
effects of privatization of Vietnamese SOEs on their firm performance. Hereafter, some
specific objectives are listed as follows:
-

Determine the direct impacts of capital structure on firm performance of privatized
SOEs in Vietnam.

-

Determine the direct impacts of private-dominant ownership and State-dominant
ownership respectively on firm performance of privatized SOEs in Vietnam.

5


-

Explore the moderating roles of private-dominant ownership and State-dominant
ownership respectively on the relationship between privatized SOEs’ performance and
capital structure.

1.4 Research questions
The study will contribute to the research literature on privatization by examining the
following question:

-

Is capital structure significantly affected on firm performance of Vietnamese privatized
SOEs?

-

Is private-dominant ownership structure significantly affected on firm performance of
Vietnamese privatized SOEs?

-

Is State-dominant ownership structure significantly affected on firm performance of
Vietnamese privatized SOEs?

-

Is moderating roles of private-dominant ownership structure significantly affected on
the relationship of firm performance and capital structure?

-

Is moderating roles of State-dominant ownership structure significantly affected on the
relationship of firm performance and capital structure?

1.5 Research scope
The study was conducted based on data from all privatized Vietnamese SOEs currently
listed on Ho Chi Minh Stock Exchange and Ha Noi Stock Exchange. The panel data were
taken from annual report and audited financial statement in the latest five years (from 2011
to 2015) to perform theoretical testing. Therefore, the result of study only statistically

performs a period process of how privatization made impact on performance of Vietnamese
privatized firms.
1.6 Research contribution
This study contributes to better understanding on privatization in previous literature.
Firstly, although there are a numerous of previous studies only focused on the status of
privatization, some studies conducted on privatization and its effect on firm performance that
6


used the outdated data. Thus, this study will contribute to the current literature on privatization
with recent data set in context of Vietnam.
Secondly, this study examines the interaction between ownership structure (represented by
private-dominant ownership and State-dominant ownership), capital structure (represented by
debt to equity ratio) and firm performance of privatized SOEs, especially in Vietnam.
Hierarchical multiple regression analysis was employed for the test of moderating effects of
ownership structure (e.g Cohen & Conhen, 1983). While there are many studies assessing the
impact of privatization on firm performance, there are no systematic data on percentage shares
of private sector in privatized SOEs. Then it has not been yet assessing the result of
privatization under private-dominant ownership and State-dominant ownership affect to firm
value. Hence, this study provides further insight of the ownership structure and capital
structure of privatized firms in an emerging market as Vietnam.
Moreover, prior studies used data from a limit range of sample such as choosing sample in
specific industries, firm size, etc. while this study applies data from the almost listed
privatized firms in Vietnamese market. Therefore, this study contributes to build a systematic
data and give overall picture for Vietnam Government, the potential investors, and scholars
in building an appropriate ownership structure depending on each types of SOEs or assessing
a firm performance. Finally, this study could enrich the profound literature about privatization
and recommend some issues for future research.
1.7 Research structure
This research is divided into five chapters as follows:

Chapter one – Introduction: states the background of the research, research questions,
research contribution and objectives doing this research as well as general methodology and
scope.
Chapter two – Literature review: provides review of the relevant academic literature on
privatization of Vietnamese SOEs, the effects of ownership structure and capital structure on

7


firm performance. On ground of preceding literature, it will develop the hypotheses and
model.
Chapter three – Methodology: performs detailed methodology in terms of the approaches
used and the data collection as well as data analysis method. It includes descriptive statistics
and regression analysis, which are used to test the hypothesis and investigate the correlation.
Chapter four – Data analysis: analyses the collected data that contain the results from using
descriptive analysis and regression analysis, and applying some other methods.
Chapter five – Conclusion and recommendation: discusses the findings and some
implications made by the research. At last, the research presents some recommendations for
future studies.

8


Chapter 2

Literature Review

This chapter comprises two parts: First is to review comprehensively the theoretical
arguments and empirical studies on privatization, the effects of ownership structure and
capital structure on firm performance. It begins with research on status of privatization and

Vietnamese economy in recent years. Subsequently, theoretically tacitly effect of ownership
structure and capital structure on firm performance are carried out. Thirdly, it is based on the
previous studies to employ two theoretical models to explain the findings. This chapter aims
to provide a comprehension of previous papers and to develop the research model to examine
the privatization as well as to provide a basis for the research hypotheses and methodologies
in following chapters.
2.1 Privatization
2.1.1 Definition of privatization
Privatization has become a worldwide phenomenon through its effects on economic
growth. Since 1989, countries in Central and Eastern Europe were conducted the privatization
process for more than 70,000 enterprises, and now it became a major item on the policy
agenda in many developing countries. Privatization was a key issues becoming more
important in developing countries in every industry and service sector. It was considered as a
potential method of economic policy for many governments all over the world (Pham &
Carlin, 2008).
Privatization is defined in many ways in previous literature. Many studies also referred
privatization as “reformation”, “transformation”, or “equitization”. It is the transfer the
properties or businesses of a wholly owned State-owned enterprise and sell share to private
sector to create a joint-stock company (JSC). The privatized JSC operates in compliance with
the Enterprise Law and be considered as “public firm”.
Privatization was forcefully carried on with the great expectations of the government on
promoting efficiency of SOEs and increasing revenue. It included the actions and activities to
transfer ownership from State to private sector and required careful methods and time
(Sriboonlue, 2007). Zhang (2005) stated that privatization was a serious effort not only to
9


create a new contractual relationship in government but also to build a positive alternative to
public programs. Developed as well as developing countries both determined that
privatization programs would mostly enhance the firm performance to contribute economic

growth not only for private firms but also for country. Based on the analysis of developing
and advanced industrial economies about the privatization, it was found that privatization
improved profit efficiency and increased economic growth (Al-Otaibi, 2006).
State-owned enterprises (SOEs), which were established by capital of State, maintain its
100 percent of State ownership. By privatization, SOEs were divided into shares, which
attached the rights and responsibilities for business operations on the hands of shareholders.
This meant it would be no longer controlled completely by Government. The formation of a
partnership between State and private parties would depend on the choice of privatization.
The privatization also classified into two other types: (1) outsiders (including foreign
investors and local investors) through initial public offerings (IPOs), direct sales and strategic
alliances, and (2) insiders (including the State, managers, and employees) through labor
buyout or voucher sales. The main difference between these two types was the participation
of these shareholders in business operation before and after privatization (Phuong, 2012). In
addition, based on Wattanakul (2002), the privatization could be (1) partial, in which
government remained their shares, or (2) full, in which State divested entirely their shares
(Figure 4). To complete privatization process (meaning 100 percent of shares owned by
private sector), it was evaluated depending on the size of SOE, its importance to country’s
economy, strategy sectors such as aviation, electricity, etc. With the partial privatization, the
ownership structure was divided into three groups including: State-dominant ownership,
Equal private and government ownership, and Private-dominant ownership. However, in
practical, it was rarely to have equal private and government ownership structure since it was
difficult to distribute the governing power of the business. Therefore, it remained Statedominant ownership and private-dominant ownership in partial privatized SOEs, in definition
that State-dominant ownership means State holding greater than 50% of shares, whereas
private-dominant ownership means private sector holding greater than 50% of shares.

10


Figure 4 Choices of ownership privatization
Source: Wattanakul, 2002

2.1.2 Objectives of privatization
The purpose of privatization is not only to reduce the number of SOEs and the level of
State ownership in Vietnam but also to improve the economic and financial performance of
SOEs by ownership shifts (Boubakri, Cosset & Guedhami, 2004). According to Castater
(2003), privatization process happened on the purpose of increase financial and operating
efficiency of privatized firms to public welfare. Privatization was hoped to result to great
benefits for a country’s economics. Improvement in economy efficiency and quality was
considered as a key objective of privatization. Through increasing competition, it would
increase output, decrease price, utilize resources, create well-functioning markets and fair
environment in investment.
It might increase the efficiency of SOEs because ownership structure was changed,
subsequently to create the motivations for specific entities to utilize all of resources. It was
considered as a financial solution based on privatization to improve ownership structure and
clearly determine the rights and responsibilities of each entity contributing to company.
On the purpose of mobilizing capital from private investors, privatization allowed
individuals, organization, or even foreigners joining the business activities of former SOEs.
11


By this way, SOEs might raise funds to increase charter capital, enlarge business operation,
or update new technology, purchase facilities, develop available resources, etc. Since
privatization allowed employees/managers to be shareholders, they was believed to increase
their commitment to the corporate based on their contributions (Thi, 2012). Moreover,
according to Adam (2007), privatization could help enterprises to attract more investment,
especially foreign direct investment, which might bring transfer technology, management
skills, development of human resources, and access to international market. This was
expected to contribute to develop corporate business operation.
Above all, the government attempted to accelerate the privatization process for the purpose
of better performance than former SOEs. Several studies found positive financial results from

privatized SOEs. Wattanakul (2002) collected some evidences to prove that privatization of
firms in developing countries contributing to increase in net income on sales and assets.
Private investors were encouraged to strengthen firm efficiency, improve organization in
firms.
In summary, the privatization of SOEs aims to the following objectives:
(1) To decrease the State governance, increase private ownership;
(2) To mobilize capital from private sectors for specific purposes;
(3) To increase the participation of employees/managers which leading to strengthen their
commitment to their enterprise;
(4) To result a better firm performance.
2.2 Privatization in Vietnam
As mentioned above, Vietnam Government is carrying public debt around 61.3% of GDP
at the end of 2015, in which SOEs is taking account of more than half of country’s bad debt.
Since there were many inefficient SOEs, Vietnam Government endeavored to accelerate the
privatization for past decades. The State would decide to maintain the percentage of State
share. Through privatization, governments either wholly or partly sold their interests in SOEs
to domestic or foreign private sector investors or to enterprises’ employees/workers by public

12


auction or through stock market. It was a major process for Vietnamese economy transferring
from the centralized to market based economy.
According to Dharwadkar et al. (2000), traditional theories are quite rational in developed
economies, where there had efficient legal system and strong governance context. However,
in most emerging economies, there were imperfect legal system leading to the lack of ability
to protect rights of minority shareholders and debt-holders in many circumstances (Sarkar &
Sarkar, 2005). Even though, in economies with emergence of rigid legal regulations, law was
still ineffectively enforced. Therefore, this study considered all the rationales in Vietnam’s
weak corporate governance.

The privatization process in Vietnam has been carried out through the main following
methods, which included (1) sale of small SOEs that had poor performance, (2) operating
foreign joint venture which was the combination of both SOEs and at least one foreign
company, (3) privatization of SOEs, and (4) establishing private entities (Thi, 2012). Through
these four methods above, it was easily to see that Vietnam had been proceeding the
privatization slowly and carefully which was suitable with the country’s economics through
each stage.
According to Decree No.59/2011/ND-CP dated July 18th, 2011 of Vietnam Government
on the transformation of 100% SOEs into Joint Stock Companies, the objectives of
privatization was to mobilize the capital and seek for investment from both inside or outside
potential investors. In fact, privatization of SOEs in Vietnam was still proceeding slowly and
stably over the past years. This led to problem that SOEs could not develop as much as
expected. In recent years, Vietnam showed a very high economic growth, which meant the
privatization progress did not bring serious harm to the economy of country in short term
(Sjöholm, 2006). However, in longer term, there might lead to unpredictable consequences if
Vietnam would not put harder effort on implementation to privatize the SOEs completely. At
present, SOEs has still been holding the dominant role in Vietnamese economy. At the
beginning of “doi moi” program in 1986, Vietnam had over 10,000 SOEs. As Table 1, the
total Vietnamese SOEs were privatized is 4,210 firms until 2015, in which it described a
13


blooming in period middle of 1998 to 2006 with 3,576 SOEs equitized. However, there was
a slow progress from 2007 until now. According to report on privatization of SOEs of
Department of Corporate Finance, Ministry of Finance (2015), in period 2007-2010, there
only achieved 30% of privatization compared to the plan. The privatization process still was
slow down due to some objective factors, which were related to company evaluation, bad
debt, etc. (Thi, 2012). The total number of privatized SOEs in period 2011 – 2015 was only
248. In latest two years, the purpose number of SOEs being privatized in 2014-2015 was 432
but the actual SOEs were proceeded to be privatized was 153, which only achieved 35%

compared to the plan.
Table 1

Number of Vietnam SOEs being privatized from 1992 to 2015

No.

Period

Number of
privatized SOEs

1

Pilot stage of privatization (1992 - middle of 1996) according to Decision
No.202-CT dated June 8th, 1992.

5

2

Expanding the pilot stage (middle of 1996 - middle of 1998) according to
following Decrees No.28/CP dated May 7th, 1995 and No.25/CP dated March
26th, 1997 of the Government.

25

3

Promoting pilot stage (middle of 1998 - 2010) according to following Decrees

No.44/1998/ND-CP dated June 29th, 1998; No.64/2002/ND-CP dated June
19th, 2002; and No.109/2007/ND-CP dated June 26th, 2007.

3932

- Middle of 1998 - 2002

4

927

- In period of 2003 - 2006

2649

- In period of 2007 - 2010

356

Privatization to restructure SOEs (2001 until now) according to Decision
No.929/QD-TTg dated July 17th, 2012; Decree No.59/2011/ND-CP dated July
18th, 2011

248

-

In 2011

16

-

In 2012

13

-

In 2013

66

-

In 2014

143

-

In 2015

10
Total

4210

Source: Data from Ministry of Finance and Vietnamese Legal Documents

14


After proceeding privatization since 1996, to accelerate the process, Vietnam Government
has changed the method of privatization from direct sales to public offerings according to
Decree No.187/2004/ND-CP. At early stage in 2002, Government still put the limitation of
share percentage that non-state owners could hold in SOEs (individual and entities were
allowed to buy respectively 5% and 10%). However, from 2005 to now, privatization IPOs
are the most method applied in process, and it even allowed foreigner investors to hold a
limited share of privatized SOEs up to 49% (Thi, 2012). This action of Government not only
attracted for more foreign investors’ participations and but also increased the total market
capitalization. At this time, Vietnamese regulations gave foreign investor the right to own up
to 49% of non-financial enterprises. Recently, Vietnam Government issued the Decree
60.2015/ND-CP dated June 26, 2015, in which foreign investors are allowed to set their own
limits up to 100% of shares in some sectors. In general, issuing Decree 60.2015/ND-CP was
considered as a major step of Government to speed up the privatization process means by
opening up the market for more foreign investors. Table 2 showed some privatized SOEs with
foreign ownership holding around 49% of shares, in which some of these firms are one of the
biggest companies in such sector.
Table 2

Vietnamese privatized SOEs with foreign ownership of around 49%
Name

Sectors

Vietnam Dairy Product JSC (Vinamilk)

Food products

Refrigeration Electrical Engineering Corporation

Industrial machinery

DHG Pharmaceutical JSC

State

Foreign

ownership

ownership

(%)

(%)

45.05

49.00

5.30

48.00

Pharmaceutical

43.31

48.99

Binh Minh Plastics JSC

Plastics

29.51

48.99

PetroVietnam Insurance JSC

Insurance

36.85

49.00

Cotec Construction JSC

Construction

0.00

43.63

Bibica Corporation

Food products

0.00

48.96

Source: Data and information from annual reports 2015 of these Corporates

15


After two decades of unstoppable efforts, Vietnam’s latest achievement was to successfully
offload some shares and boost its stock market in 2015. Before that, Ministry of Finance
reported 96 SOEs with the total charter capital of 3.14 billion USD had been organized to
IPOs in both HSX and HNX and it brought 2.29 billion USD to the State budget with paid in
capital of 1.9 billion USD in 2007 (Thi, 2012). Recently, through SCIC, the State prepared to
sell entire State capital in ten big SOEs, including Vinamilk that was the biggest listed
company in Vietnam. According to SCIC, this was expected to bring in about four billion
USD to State budget. The earnings would enormously help the Government repay the current
heavy public debt. In addition, the government’s attempt to privatize Vietnam Airlines began
initially in late 2014 and made successful result in late 2015. These were the most outstanding
achievements in the recent years of Vietnam Government in privatization program. With all
the non-stop efforts, Vietnam Government had made a lot in progress of fully privatization
because there remained a great number of partial-privatization SOEs.
As Sriboonlue (2007), reasons for privatization would vary among different countries. In
context of Vietnam, there are two main reasons for privatization becoming an urgent case.
The first reason was the poor performance of SOEs. While SOEs held mostly the large
resources of country such as nature resources, capital and labor, they have been using these
resources for granted. At present, the Government has not statistically stated a clear data on
SOEs, for example, the number of SOEs with their capitals, annual revenue, rate of equity,
etc. To maintain these SOEs, the government must cover directly or indirectly the corporate
management cost by dropping debts, increasing capital, promotion on credit, etc. This

accidentally put a hard pressure on people who have been still paying tax to raise capital for
SOEs. Second reason is the economic growth of Vietnam is evaluated as unhealthy although
it has been growing well in past years which the indicator showing quite high. From that,
privatization is a suitable policy to mitigate the problems and improve performance of SOEs.
Even though the Government endeavored to make significant steps in privatization, it was
still slow down with some following reasons. First of all, the current SOEs were subject to
equitize have larger scale, complicated financial, extensive operation, etc., such as economic
16