The impact of macroeconomic uncertainty on corporate investment the case study of vietnam shareholder

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

“THE IMPACT OF MACROECONOMIC UNCERTAINTY
ON CORPORATE INVESTMENT”
THE CASE STUDY OF VIETNAM

BY

NGUYỄN NGỌC PHƯƠNG LINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2017


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

“THE IMPACT OF MACROECONOMIC UNCERTAINTY
ON CORPORATE INVESTMENT”
THE CASE STUDY OF VIETNAM
A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYỄN NGỌC PHƯƠNG LINH
CLASS 22

Academic Supervisor:

DR. NGUYỄN THU HIỀN

HO CHI MINH CITY, DECEMBER 2017


ACKNOWLEDGEMENTS

To complete the dissertation, I received a lot of attention, help from the school, lecturers,
friends and relatives. First of all, I would like to express my gratitude to Dr. Nguyen Thu
Hien, who gave her heartfelt guidance, specific comments and encouragement throughout my
thesis’s implemented process. Special thank goes to Mr. Nguyen Thanh Vinh for his supports
in analyzing the data. Sincerely I appreciate lecturers teaching Vietnam – the Netherlands
programme for M.A. in Development Economics who have conveyed valuable knowledge,

practical experience for me during the study program. Finally, it is pleased to thank my
friends and family for their support and encouragement throughout the course of my
dissertation.
Ho Chi Minh City, December 2017
Performer
NGUYỄN NGỌC PHƯƠNG LINH

i


ABSTRACT

Employing proxies of macroeconomic uncertainty of Baum et al. (2005), I am based on the
proposed empirical model of Gulen and Ion (2015) to examine how corporate capital
investment is affected by macroeconomic uncertainty for enterprises of Vietnam in the period
of 2005 and 2015. My estimates present that the research has strongly explained a negative
relationship between the volatility of macroeconomic in real GDP, CPI and the activities of
capital expenditures in general as well as mergers and acquisitions in particular. More
importantly, this effect is significantly stronger for firms with a higher growth rate and non –
financial constraints. Overall, the study contributes to confirming macroeconomic uncertainty
to limit the investment of enterprises and subsequently depress Vietnam economic growth.
JEL classifications: E20, E22, E44, E60, E63, G30, G32, G34
Key words: corporate investment, mergers and acquisitions, macroeconomic uncertainty,
ARCH (GARCH), financial constraints, growth potential.

ii


COMMITMENT

I pledge that the contents of this dissertation conducted under the direct guidance of Dr.
Nguyen Thu Hien. All references in the dissertation are clearly quoted in the name of the
author, the name of the work, the time and place of publication. Any unauthorized copying,
violation of training regulations, or fraud, I will take full responsibility.
Ho Chi Minh City, December 2017
Performer
NGUYỄN NGỌC PHƯƠNG LINH

iii


TABLE OF CONTENTS

ACKNOWLEDGEMENTS ........................................................................................................ i
ABSTRACT ............................................................................................................................... ii
COMMITMENT .......................................................................................................................iii
TABLE OF CONTENTS .......................................................................................................... iv
TABLES .................................................................................................................................... vi
FIGURES AND ILLUSTRATIONS ........................................................................................ vii
ABBREVIATIONS .................................................................................................................viii
CHAPTER 1. INTRODUCTION ............................................................................................ 1
1.1.

Background .................................................................................................................. 1

1.2.

Research objectives ...................................................................................................... 8

1.3.

Research objects and scopes ........................................................................................ 9

1.3.1.

Research objects ................................................................................................... 9

1.3.2.

Research scopes .................................................................................................... 9

1.4.

Research methodology ................................................................................................. 9

1.5.

Research significance ................................................................................................ 10

1.6.

Research structure ...................................................................................................... 11

CHAPTER 2. LITERATURE REVIEW ............................................................................... 12
2.1.

The relationship between macroeconomic uncertainty and investment .................... 12

2.1.1.

Macroeconomic uncertainty ............................................................................... 12

2.1.2.

Corporate investment .......................................................................................... 14

2.1.3.

Factors impacting on the investment of enterprises ........................................... 15

2.1.4.

Impact of macroeconomic uncertainty on corporate investment........................ 17

2.1.5.

Robustness check-sub-sample categories ........................................................... 19

2.2.

Previous researches .................................................................................................... 19

2.3.

Suggested models and hypotheses ............................................................................. 23

CHAPTER 3. RESEARCH METHODOLOGY ................................................................... 25
3.1.

Analytical framework ................................................................................................ 25

3.2.

Data ............................................................................................................................ 26

3.3.

Empirical model ......................................................................................................... 26

3.4.

Variable measurement ............................................................................................... 28

3.4.1.

Dependent variable ............................................................................................. 28

3.4.2.

Independent variable........................................................................................... 28
iv


3.4.3.

Controlling variables .......................................................................................... 28

3.4.4.

Variables for categorizing subsamples ............................................................... 28

3.5.

Estimation method ..................................................................................................... 29

CHAPTER 4. RESEARCH RESULTS ................................................................................. 31
4.1.

Measuring macroeconomic uncertainty ..................................................................... 31

4.2.

The link between macroeconomic uncertainty and corporate investment ................. 33

4.2.1.

Summary statistics .............................................................................................. 33

4.2.2.

Correlation matrix .............................................................................................. 36

4.2.3.

Results for all firms ............................................................................................ 37

4.2.3.1.

MU1 – GDP and corporate investment ...................................................... 38

4.2.3.1.1. MU1 – GDP and capital expenditure proxy ............................................. 38
4.2.3.1.2. MU1 – GDP and mergers and acquisitions proxy .................................... 39
4.2.3.2.

MU2 – CPI and corporate investment ......................................................... 41

4.2.3.2.1. MU2 – CPI and capital expenditure proxy ............................................... 41
4.2.3.2.2. MU2 – CPI and mergers and acquisitions proxy...................................... 42
4.2.4.

4.3.

Results for firms classification ........................................................................... 43

4.2.4.1.

MU1 – GDP and capital expenditure regarding growth potential .............. 44

4.2.4.2.

MU1 – GDP and capital expenditure regarding financial constraints ........ 45

4.2.4.3.

MU2 – CPI and capital expenditure regarding growth potential ................ 47

4.2.4.4.

MU2 – CPI and capital expenditure regarding financial constraints ......... 48

Discussions ................................................................................................................ 49

CHAPTER 5. CONCLUSIONS ............................................................................................ 51
5.1.

Overview outcomes ................................................................................................... 51

5.2.

Research limitations ................................................................................................... 54

REFERENCES ......................................................................................................................... 55
APPENDICES .......................................................................................................................... 58

v


TABLES

Table 2.1: Expectation of the relationship between macroeconomic uncertainty and corporate
investment…………...................................................................................................................... 18
Table 4.1: Augmented Dickey – Fuller Unit Root Test for MU proxies....................................... 32
Table 4.2: The time series results of variables representing macroeconomic uncertainty ............ 32
Table 4.3: Summary statistics........................................................................................................ 34
Table 4.4: Correlation matrix ........................................................................................................ 36
Table 4.5: Results of regression model of MU1GDP on CAPEX................................................. 39
Table 4.6: Results of regression model of MU1GDP on M&A .................................................... 40
Table 4.7: Results of regression model of MU2CPI on CAPEX .................................................. 42
Table 4.8: Results of regression model of MU2CPI on M&A ...................................................... 43
Table 4.9: Impact of MU1GDP on CAPEX regarding growth potential ...................................... 45

Table 4.10: Impact of MU1GDP on CAPEX regarding financial constraints .............................. 46
Table 4.11: Impact of MU2CPI on CAPEX regarding growth potential ...................................... 47
Table 4.12: Impact of MU2CPI on CAPEX regarding financial constraints ................................ 48

vi


FIGURES AND ILLUSTRATIONS
Figure 1.1: The criterion of Maastricht Treaty of Vietnam ............................................................. 3
Figure 1.2: Real GDP growth in Vietnam, advanced economies, emerging and developing
economies, and the world. ............................................................................................................... 4
Figure 1.3: The proportion of inflation and the growth of investment of Vietnam ......................... 5
Figure 1.4: Mergers and Acquisitions (M&A) of Vietnam ............................................................. 7
Figure 3.1: Framework of the relationship between macroeconomic uncertainty and corporate
investment…….............................................................................................................................. 25

vii


ABBREVIATIONS
CAPEX

Capital Expenditure

CAPEXTA

Capital Expenditure to Total Assets

CAPX

Capital Investment

CF

Cash Flow

CFTA

Cash Flow to Total Assets

CPI

Consumer Price Index

EU

European Union

FC

Financial Constraints

FE

Fixed Effect

GDP

Gross Domestic Product

HNX

Ha Noi Stock Exchange

HOSE

Ho Chi Minh Stock Exchange

IMF

International Monetary Fund

MADUMMY

Merges and Acquisitions Dummy

MU

Macroeconomic Uncertainty

NFC

Non – Financial Constraints

OLS

Ordinary Least Square

PU

Policy Uncertainty

RE

Random Effect

SG

Sales Growth

TA

Total Assets

TQ

Tobin’s Q

UK

United Kingdom

UPCOM

Unlisted Public Company Market

US

United States

WTO

World Trade Organization

viii


CHAPTER 1.

1.1.

INTRODUCTION

Background
Stable and long – term sustainable growth is what many domestic and foreign

economists recommend and become one of the most strategic objectives that every nation
puts so much attempt to move towards. In such a purpose, the impact of macroeconomics
is an intense concern that interests a great number of researchers, policymakers, investors
and portfolio managers of businesses. Volatility of macroeconomics plays important role
to affect most sectors of economy and lead to the adjustments of economic growth as well
as the production process of enterprises. More specifically, macroeconomic uncertainty
can be attributable to be related to short – term fluctuations in macroeconomic variables
such as gross domestic product (GDP), inflation, budget deficits and current accounts. In
addition to other impacts, the volatility of macroeconomics may undermine long – term
growth potential due to declining confidence and willingness to invest.
The notion of macroeconomic uncertainty has not been completely integrated
between the studies. Thereby macroeconomic instability is understood as a circumstance
of economic malaise where the economy does not seem to have remained stable and
where, eventually, something needs to be done for dragging it back on track (Azam,

2001). According to Hausman and Gavin (1996), macroeconomic stabilization requires
ensuring three factors in one economy composing growth, investment and labor
productivity. Other works in the field include the research of Fischer (1993), Bleaney
(1996) and Ismihan et al. (2002), who all take related approaches that an increasing
macroeconomic uncertainty means a rise in one of the indexes that would hold inflation
rate, deficit to GNP ratio and foreign debt to GNP ratio. Meanwhile, Sameti et al. (2012)
also argue that macroeconomic uncertainty is assessed by the volatility of a set of
macroeconomic variables which are growth, inflation, current balance deficit, foreign
exchange reserves and budget deficits. In general, it can be primarily unified that
macroeconomic uncertainty is a concept that describes the deterioration of important
macroeconomic variables in the economy, manifested and monitored over time through a
combination of these variables such as growth, inflation, current account deficit, foreign
exchange reserves, external debt and budget deficits. These aforesaid indexes are serious
drivers of economic growth.

1


In terms of the criteria of the Maastricht Treaty (or so – called convergence
criteria) by the EU Member States in 1991, macroeconomic stability is measured by five
indicators as follows:
The first is a low and stable inflation. A high or unstable inflationary effect
threatens economic growth and increases the risk premium. Since many types of rates are
adjusted for inflation, then the volatility of inflation may alter Government revenues and
personal debt. The highest inflation rate under the Maastricht criteria is 3 percent.
The second is to stay a low level of long – term interest rates. This indicator
reflects a stable inflation expectation in the future. Although the current inflation rate is
low, high long – term interest rates suggest that inflation may rise in the nearly time.
Holding low interest rates manifests that the economy is stabilizing and may continue to
be so stable. The highest degree of long – term interest rate based on the Maastricht Treaty

makes up about 9%.
National debt to GDP ratio is the next criteria to adapt thereby the low level
displays that the Government has the flexibility to employ tax revenues so as to meet
domestic capital needs rather than repay foreign creditors. In addition, a low national debt
also allows lenient use of fiscal policy in the face of crisis and 60 percent is the highest
approval of national debt to GDP ratio according to the convergence criteria.
Besides, budget deficit has to be remained low. Regarding the criteria of the
Treaty of Maastricht, the budget deficit at 3 percent of GDP is acceptable.
And finally, currency stabilization is the policy – oriented objective. Currency
stabilization allows imports and exports to develop in line with long – term strategies and
to minimize exchange rate risk for investors. As the criteria of the convergence criteria,
the euro has the highest fluctuation band of 2.5%.

2


70

Criteria of the Maastricht Treaty of Vietnam
(% per year)

60
50
40
30
20
10
0
2005

2006

2007
2008
2009
Government budget
Interest rate

2010

2011

2012
2013
2014
Government debt to GDP
Inflation rate

2015

Figure 1.1: The criterion of Maastricht Treaty of Vietnam
(Source: IMF, Worldbank and General Statistics Office)

Thus, based on the criteria of the Maastricht Treaty, Vietnam economy was
facing macroeconomic uncertainty in the considered period of time. Inflation was under
pressure according to the General Statistics Office. The highest inflation rate was marked
in 2008 with 23.1% due to the global crisis. In 2011, CPI rose by 18.7% compared to the
end of 2010. As can be seen, the rate of inflation has been serious and gradually declined
more recently through the management and adjustment of policymakers. Interest rates
were also high, along with rising exchange rate pressures, high and prolonged budget

deficits, high national debt. Since 2008, interest rates have been fluctuating with the ups
and downs of the economy. Basically, interest rates increased sharply between 2009 and
2011 with a peak level of 17% per year owing to high inflation. By the end of 2010, the
national debt accounted for 48.1% of GDP, increased by 3% compared to 2009 and
presented by an upward trend to 2015 at 57.3% of GDP. As is shown by the graph,
Vietnam has had a continuous budget deficit in the last 11 years with the rate above 5%.
This deficit is the highest in comparison with other countries in the region of South East
Asia. All criterion displayed in Figure 1.1 generally exceed the acceptable level of the
Maastricht Treaty and then demonstrate a circumstance of macroeconomic uncertainty in
Vietnam on the assumed period.

3


Economic uncertainty is the state of the economy in which the fiscal and
monetary policies of the Government do not work, leading to the fluctuation of indicators
of the economy such as high inflation rate, a rise of unemployment proportion, large trade
deficits, and the financial system is facing high risk of instability. This makes production
stagnant, the purchasing power of the domestic market fall. Loayza and Raddatz (2007)
argue that besides inadequate economic policies such as monetary policy and fiscal policy,
external shocks are the source of macroeconomic uncertainty in the country. Accordingly,
the authors argue that the shock of foreign trade and the volatility of capital inflows are
the sources of macroeconomic uncertainty. In addition, according to Clipa and Caraganciu
(2009), in the context of an open economy in general, especially in developing economies,
the effects of a global crisis can be spread through financial channels, foreign trade and
investment.
In the period before the end of 2007, Vietnam has always been considered one of
the bright spots in the global economic map. By joining the World Trade Organization
(WTO) in 2007, the real GDP growth rate reached nearly 7.1% and more highly than the
growth of advanced economies and the whole world with 5.7% and 2.7%, respectively.

The financial crisis in the United States from late 2007 has rapidly spread to
major economies, has become a financial crisis, a global recession and a serious impact on
economies around the world. Vietnam is not outside the impact with the decline of 1.4%
in GDP growth but being still higher than the growth of the rest of world because the
nation was not directly affected by the crisis.

Real GDP Growth (%per year)
10,0

8,0
6,0
4,0

2,0
0,0
2005
-2,0

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-4,0
Vietnam

Emerging and Developing Economies

Advanced Economies

Worldwide

Figure 1.2: Real GDP growth in Vietnam, advanced economies, emerging and
developing economies, and the world.
4


(Source: IMF)

In accord with Paul Krugman, a leading expert on the world economy, the crisis
has made demand for durable or capital goods decline primarily in the US in a medium
term. Hence, countries with capital production advantages will be most affected. In other
words, the most developed economies, such as Japan and Germany, will bear the long –
term consequences. Meanwhile, economies that have the advantage of producing
consumer goods such as China, Vietnam and developing countries, the outcomes will be

less, and the resilience will be faster. Despite an unnoticeable effect, the impacts of the
world financial crisis also have severely affected the achievement of Vietnam's economic
growth target in 2008. The GDP growth rate in 2008 was only 5.7% lower than the aim
approved by the National Assembly of 7%. GDP growth subsequently slowed down in
2009 and rebounded in 2010.
In the integration and opening up of the economy, investment is a major factor in
the aggregate demand of the whole economy in general and most enterprises in particular.
According to World Bank data, investment usually accounts for 24% to 28% of the
aggregate demand of all countries in the world. Increased investment makes the demand
for relevant factors increase, the production of various industries grow, attracts more labor
force, reduces unemployment as well as improves social welfare. All these effects
facilitate economic development.

Inflation and investment growth of Vietnam
(% per year)
31,5
23,1
18,7
17,9
8,4

17,9
7,5

15,9
8,3

17,1

14,9

6,7

9,2

11,3 9,1

9,3 6,6 8

12

11,9
4,1
0,6

2005

2006

2007

2008

2009

2010

Inflation rate

2011

2012

2013

2014

2015

Investment growth

Figure 1.3: The proportion of inflation and the growth of investment of Vietnam
(Source: General Statistics Office)

5


According to General Statistics Office, the ability to attract foreign direct
investment (FDI) in the years of world economic fluctuations has decreased markedly.
Investment growth was 31.5% in 2007, a significantly high figure after becoming a
member of WTO. However, the global crisis led to a decline in the volume of FDI
inflows, while indirect investment flows from foreign investors were unstable. The
massive influx of capital puts pressure on money supply, which causes inflation to rise.
The massive capital inflows poured into the second half of 2007 and the first quarter of
2008 led to a fall in the exchange rate and to stabilize the exchange rate, the State bank of
Vietnam implemented interventions in the forex market. As a consequence, the amount of
circulation in the economy increased rapidly, leading to a sharp increase in the CPI with a
peak of 23.1% in the end of 2008. Investment growth in 2008 dropped significantly to
half, continued a downward trend in the following years and the average of investment
growth is only 13% a year in this period of time.
As can be agreed that investment plays a very important role in the formation

and development of an enterprise, so requiring investment decisions must be carefully
considered. The investment decision is made after considering various factors when
examining the most influential factor existing in almost enterprises, the factor of economic
uncertainty. Determining the present value of investment projects, constructing optimum
capital budgeting practices and minimizing the cost of capital for firms depend mainly on
the estimation of macroeconomic volatility.
The sustainable growth is very necessary if enterprises want to survive long –
term on the market. There are many factors that help firms grow sustainably, depending
on the business context as well as general economic developments in which firms choose
the right approach for themselves. M&A deals have addressed the growth target to help
new enterprises enter the fast – growing market or enterprises are moving to new phase do
not want to fall into recession. Maney et al. (2011) stated that the nature of M&A has
developed towards a consolidation tactic so as to comprise strategic growth, expansion
and innovation. In the economy where the average transaction deal price is well –
controlled, implying the price paid for a firm is equal to or above market value. In good
economic conditions, the volume of deals rises as a favorable means for growth to
complement organic expansion. M&A is also a type of investment but referring to the
formation of self – investment instead. In Vietnam, M&A activity has emerged recently
and seems to be like the commencement compared to the world.

6


As is illustrated in Figure 1.1, the number of M&A deals in 2005 was only about
28. Particularly since 2007, the number of mergers and acquisitions has increased sharply
in both volume and scale, with 119 deals, attached to the fact that Vietnam joined the
WTO on January 11, 2007. M&A activity took place in various fields such as finance,
banking, securities, insurance, etc. Since 2008, M&A transactions in Vietnam have risen
significantly in both volume and value. In 2012, there were 364 deals worth 4.2 billion
dollar and up to 535 deals by 2015 with 5.3 billion dollar.

600

6

500

5

400

4

300

3

200

2

100

1

0

0

Value of Transactions (in bil.USD)

Number of Transactions

Mergers and Acquisitions of Vietnam

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Deals

Value

Figure 1.4: Mergers and Acquisitions (M&A) of Vietnam
(Source: imaa-institute.org)

The most visible feature of M&A activities in Vietnam is that the vast majority
of M&A transactions have foreign elements, accounting for 66%. The presence of foreign
businesses in Vietnam's M&A deals has depicted the level of attraction of the Vietnamese
market and the need for foreign investors to enter the Vietnamese market is through the
connection with national partners. Similar to FDI attraction, the most important factor of
attracting M&A activities is the business investment environment and stable
macroeconomic situation.
On the other side, macroeconomic uncertainty has different degree of effects on
different patterns of firms. Most of the empirical evidence shows that firms with the level
of growth rate and financing constraints significantly affect corporate investments. Bond
et al. (2003) test the impact of financial factors on corporate investments in Belgium,
France, Germany and the UK and find significant effects in all nations. They report more
economically significant results for the UK, suggesting that financial constraints on
7


corporate investments may be relatively more severe in the more market – oriented UK

financial system than in the continental European countries, which tend to be bank –
based. Similar findings were obtained by Hall et al. (1999) when investigating whether a
firm’s cash flow influences investments and R&D in French, Japanese and U.S. high –
tech firms. They document a significant impact in all nations and a higher sensitivity of
investments and R&D in the U.S., which, like the UK, is characterized by a market –
based financial system. In terms of high growth firms, mainly small and medium sized
enterprises, their investment opportunities are more significantly concerned and play
important role in making profits as well as increasing firms’ value.
As mentioned above, stable and sustainably growth is expected to be important
for investments activities of companies. Volatility of macroeconomics in different
countries will have varying degrees of influence and will depend on the political
institutions and the regulations of the countries. There are a lot of research articles on this
topic but under different research corners. This paper is based on a previous study
examining the effects of economic uncertainty on corporate financial policies in general or
corporate investment of enterprises in particular but approached by a method which has
been taken advantage widely and deeply.

1.2.

Research objectives
The research aims to examine how the capital investment of Vietnamese

enterprises is affected by the macroeconomic uncertainty.
In other words, the objective of study is to investigate the relationship and
impacts of macroeconomic volatility on the investment of enterprises in the stock market.
There have been several studies regarding uncertainty and investment at which investment
is regarded as different measures, for instance, the value of cash holdings (see Ki and
Mukherjee, 2016; Im, Park and Zhao, 2017). Some of previous studies, to the best of my
knowledge, has examined the effects of economic uncertainty on corporate investment by
the various channels. My study contributes and develops some gaps of past research of An

(2017) with evidence from Vietnam. More specifically, I employ two different proxies of
investment consisting of capital expenditures and M&A instead of choosing only capital
expenditure as a proxy and expect that there are negatively strong correlations among
these variables.
In my analysis, I also investigate the behavior of firms with and without financial
constraints to further explore the impact of macroeconomic uncertainty on investments of
these enterprises. To be more detailed, I expect firms without financial constraints have
8


more capital for growth and therefore macroeconomic uncertainty will have more serious
impact on these firms than on firms with financial constraints. Similarly, I also expect that
firms with higher growth rate are impacted more seriously by macroeconomic uncertainty
than firms with lower growth rate. Following past studies, there are some methods using
the criteria to distinguish the characteristics of enterprises into different subsamples.
Fazzari et al. (1988) suggested classifying firms ex ante employing dividend payout
behaviour and leverage of firms as the proxies. My research is based on the study of Phan
et al. (2017) in the literature of Shareholder litigation and corporate cash holdings which
use growth rate and financial constraints for dividing subsamples and exploring the impact
of macroeconomic uncertainty on corporate investments. Besides, size and payout ratio
are the criterion for the divergence of non – financial constraints and financial constraints.
First, a firm facing higher economic uncertainty may have lower value of investment and
the degree of correlation is strong for firms which are more financially unconstrained.
Second, a firm confronting higher economic uncertainty could have lower value of
investment and it is similarly stronger for firms with a higher rate of growth.
Furthermore, one more exceptional technique is added to estimate the volatility
macroeconomic in my study. Following Baum (2005) I fit a generalized ARCH (GARCH)
model to produce the conditional variance derived from GARCH model, averaged to
annual frequency, which is then used as a measure of macroeconomic uncertainty in my
study.

1.3.

Research objects and scopes

1.3.1. Research objects
The object of research is the relationship and the impact of macroeconomic
uncertainty on the investment of enterprises in the stock market.
1.3.2. Research scopes
The research magnitude consists of 732 firms listed on the Ho Chi Minh Stock
Exchange (HOSE), Hanoi Stock Exchange (HNX), and Unlisted Public Company Market
(UPCOM), as of 31/12/2015. Study duration is considered for the period of 11 years from
2005 to 2015.

1.4.

Research methodology
The study uses quantitative methods, based on data from 732 firms listed

between 2005 and 2015 on the Ho Chi Minh City Stock Exchange, Hanoi Stock
Exchange, and Unlisted Public Company Market. The two main variables developed to
9


measure investment are Capital Expenditure (CAPEX) and Mergers and Acquisitions
(M&A).
In this paper, two proxies considered as macroeconomic uncertainty are the
volatility of real gross domestic product (GDP) and consumer price index (CPI).
The model employs control variables such as operating cash flow, Tobin's Q,
sales growth, national election and GDP growth.

Thereby the model is based on the research proposed by Gulen and Ion (2015) in
the study of Policy uncertainty and corporate investment and in conjunction with the
proposed model by Baum et al. (2005) in the study of The impact of macroeconomic
uncertainty on non-financial firms' demand for liquidity.
Moreover, my analysis researches the dependence of a binary variable under
other independent variables by using the panel probit regression model for M&A binary
distortion so as to investigate the impact of macroeconomic uncertainty on M&A
activities.
The study applies quantitative methods. The panel data are required in the
analysis. I accomplish the regression of two models by three methods including Pooling
Regression, Fixed Effect Model, Random Effect Model to determine the robustness of
results in comparison with different regression methods. Then, it is critical to determine
which regression method is the most suitable one by testing the Lagrange Multiplier test
(LM test, Breusch and Pagan, 1980) and the Hausman test (Hausman, 1978). The
Lagrange Multiplier test method is used to select the appropriate regression model
between the Pooling Regression and the Random Effect Model. While the Hausman test
method is employed to compare the Fixed Effect Model and the Random Effect Model.
From two test results, I choose the most appropriate regression model.

1.5.

Research significance
The study is expected to identify the impact of macroeconomic uncertainty on

the investment of Vietnam enterprises, namely those listed on the Ho Chi Minh City Stock
Exchange, Hanoi Stock Exchange, and Unlisted Public Company Market. From that, the
author can draw conclusions and assessments of the effect of macroeconomic volatility on
corporate investment as well as mergers and acquisitions activities of enterprises in
particular.
In addition, paper’s outcomes are anticipated to contribute empirical evidence to

the national economic management agency with respect to the influence of
10


macroeconomic volatility on enterprises’ investment, since then intensifying to control
uncertainty, promote investment and provide practical observations for who do business in
order to better understand the effect of macro uncertainty on investment and M&A
activities of Vietnam enterprises.

1.6.

Research structure
The outline of the paper is proceeded as follows. Section 1 shows the general

introduction including the basis for the formation of the topic, objectives, problems and
scope of the research, research methods, and basic results. Section 2 reviews the relevant
literatures and develops testable hypotheses, to be more specific, presenting the theoretical
basis of the topic, relevant background theories, and research model. Section 3 describes
the research methods comprising data, sample and variable measurement. Section 4
presents the research results referred to analysis and validation of the model, meaning of
variables and outcomes, and discussions. Section 5 concludes the study by inferring the
issue and commenting on the topic, acknowledging the limitations of the investigation and
suggesting future research.

11


CHAPTER 2.

2.1.

LITERATURE REVIEW

The relationship between macroeconomic uncertainty and investment

2.1.1. Macroeconomic uncertainty
Macroeconomics studies the economy at an overall level through general
indicators such as national output, inflation rates, the proportion of unemployment. The
concept of macroeconomic uncertainty is widely mentioned in the policy – oriented
literature. In the past literatures, however, this concept is almost never really determined,
and seems to refer in turn to high inflation, overvalued currency, unstable real exchange
rate, balance of payment deficit, or fiscal deficit, etc. According to Azam (2001),
everything that is going wrong in a country’s macroeconomic condition is often called
macroeconomic uncertainty.
Based on the two original researches of Baum et al. (2005) and Gulen (2015),
my study defines the conditional variances of real GDP and CPI as two proxies of
macroeconomic uncertainty.


Gross domestic product (GDP) is the monetary value of all the finished goods and
services produced within a country's borders in a specific time period. Thereby,
there are three primary methods by which GDP can be determined. These three
approaches are often termed the expenditure approach, the output (or production)
approach and the income approach. Accordingly, corporate investment contributes
to GDP growth and economic growth. Real gross domestic product (GDP) is the
inflation – adjusted measure that reflects the value of all goods and services
generated by a nation in a given year, expressed in base – year prices. A base year
is the year I choose against which to compare all other years. In accord with
Riyals, real GDP is also called gross domestic product in constant prices.



Consumer Price Index (CPI) is a percentage measure that reflects the relative
change in consumer prices of a basket of consumer goods and services, such as
transportation, food and medical care over time. The index is based only on one
basket representing the entire consumer goods. The fluctuation in the CPI is
required to assess price changes associated with the cost of living. The CPI is one
of the most commonly used indicator for measuring prices and the change in price
– inflation or deflation. When the index shows positively, it will help enterprises
increase investment and promote economic development.
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The ultimate goal of Government is to stabilize the economy of a nation and
from that boost that country’s growth sustainably. It is then implicitly entailed that what a
country suffering from illnesses ought to do is to implement a stabilization policy.
Therefore, the Government regulates economic policies to achieve macro regulatory
objectives such as efficiency, justice, stability and growth. In any economy, fiscal policy
and monetary policy are always the most important policies that determine the
macroeconomic stability of a country. Fiscal policy and monetary policy are operated by
the two agencies, the Ministry of Finance and the Central Bank, should be coordinated
between fiscal policy and monetary policy to avoid possible uncertainty (see Alesina &
Tabelini, 1990; Aurbach, 2004). However, the form and mechanism of coordination will
vary widely depending on the stage of development of the institutions and financial
markets of each country (see Hasan & Isgut, 2009). Thereby the notions of adjusted macro
policies of Government are generally indicated as follows:


In terms of monetary policy, this is one of the macroeconomic policies in which
the central bank adopts its instruments to control and regulate the supply or interest

rates in order to achieve macroeconomic targets for prices, output and jobs. In
particular, monetary stability, moderate inflation control is the basic, long – term
and even the sole objective of monetary policy. In such a purpose of economic
growth, monetary policy only contributes to obtaining this objective in the short
term. There are three main tools that affect the money supply including
compulsory reserve ratio, discount rate, buy and sell of the Government securities.
Through the impact on interest rates, the monetary policy regulates the behavior of
investment and consumption of economic entities. Therefore, monetary policy
cannot directly impact aggregate demand such as fiscal policy but must act
through intermediary targets which are either money supply or market interest
rates.



For fiscal policy, this is the Government's decision on taxes and Government
spending (investment). As a result, the fiscal policy directly affects the
composition of aggregate demand (Government spending G) and impacts on
macroeconomic targets that are primarily economic growth. When the economy is
in a case of recession, the state can reduce taxes, increase spending (public
investment) to fight against. Such fiscal policy is called expansionary fiscal policy.
On the other hand, when the economy is in a state of inflation and a hot growth
phenomenon, the state can raise taxes and reduce its spending to keep the economy
from overheating. Fiscal policy like this is called contractionary fiscal policy.
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

Regarding foreign trade policy, impacting on trade balance and payment balance
through intervention policies, exchange rates, and import and export taxes. Foreign

trade policies create favorable conditions for domestic enterprises to penetrate and
expand their markets overseas, exploiting thoroughly comparative advantages of
the domestic economy. In addition, the goal of the policy is to protect the domestic
market, creating conditions for domestic enterprises to stand firm and develop in
business. Foreign trade policy is a part of a country's foreign policy in process of
accomplishing growth objectives.

2.1.2. Corporate investment
Regarding corporate investment, this is an important activity that greatly
influences business value and indirectly affects the interests of business owners,
determines the growth of enterprises. As can be aware, these activities are use of financial
resources, material resources, labor and intellectual resources to produce business in a
relatively long time in order to obtain profit and socio – economic benefits. Thereby, firms
invest long – term capital in the formulation and addition of necessary assets to achieve
their business objectives. This activity is carried out centrally through the implementation
of investment projects. Thus, it can be said that investment is one of the strategic decisions
for enterprises. This is a long – term financing decision, which has a great impact on the
business efficiency of the business. Mistakes in the estimation of investment capital can
lead to huge capital wastage and even serious consequences for the business.
In addition, depending on the classification criterion such as investment
objectives, investment owners or the period of time of investment and executing process,
there are different types of investment as follows: investment outside the enterprises and
investment inside the enterprises; direct investment and indirect investment; short – term
investment and long – term investment. Moreover, investment activities usually take place
in two stages in which are capital investment and capital recovery.
To measure the corporate investment, I use two proxies of investment relied on
the study of Phan et al. (2017) about the literature of shareholder litigation and corporate
cash holdings and these are defined as follows:


Capital expenditures
Capital expenditure, or denoted as Capex, are funds utilized by the firm to

upgrade or purchase new physical assets such as real estate, (for example, buildings, land,
etc.), factories for production, or equipment. This type of cost is used to develop
production and maintain business operations. Such costs include everything from roof
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repair to building a new factory. Capital expenditure is collected from financial statements
of enterprises and decisions of corporate capital expenditure are regarded as an essential
item to maximize the market value of firm (see McConnell, 1985).


Mergers and Acquisitions
M&A has evolved since its origins in the early 1900s. This activity has initially

been outspread on a domestic scale when firms have bought in their own market in order
to increase their share, productivity and efficiency in their business operations. These
firms have subsequently consolidated and joined forces within a common industry so as to
strengthen size of firms.
In Vietnam, legally, according to the provisions of Article 17 of the Competition
Law (2004), "Merger means the transfer of all assets, rights, obligations and benefits of
one or more enterprises to another enterprise, and to terminate the existence of the merged
enterprise. Acquisition means the purchase by an enterprise of all or part of the property
of another enterprise sufficient enough to control or dominate the whole or a part of the
acquired business".
Generally, Mergers and Acquisitions (M&A) is the activity that takes partial or
full control of a business through the consolidation of firms or assets and investors then
possess the ownership of a part or all of that business. However, the main purpose of

M&A is to control enterprise at a certain degree rather than merely own a share of capital
or shares of the business as small and retail investors. Therefore, if an investor gains a
stake in a business, shares of this person are sufficient enough to participate in making
important decisions of the firm then it can be considered as a M&A activity. Conversely,
when an investor owns a share of capital, shares are insufficient enough to determine
important issues of enterprises, this is only regarded as a normal investment activity.
2.1.3. Factors impacting on the investment of enterprises


GDP growth
In practice, it is a measure of the rate of change that a nation's gross domestic

product (GDP) goes through from one year to another. This measure does not adjust for
inflation; it is expressed in nominal terms. This is also one of the most important
economic indicators used to examine the performance of a nation and compare it with
others as well as between different periods. From achieved results, economists can
evaluate and forecast their future and propose feasible strategies and policies. Rapid

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