The effect of trade openness on the profitability of vietnam’s food processing companies

The Effect of Trade Openness on The Profitability of
Vietnam’s Food Processing Companies
Le Hai Ha
University of Economic and Technical Industries, Vietnam
Le Thanh Huyen
Thuong Mai University, Vietnam
Abstract
In the increasing trend of globalization, the trade openness is considered as one of important external
factors impacting on the firm’s performance. In a context where international business is strongly boosted, the
level of openness of market can create opportunities for companies to improve their profit. Knowledge of the
relationship between ability of international expansion and firm performance has been a significant concern
for theory development in the strategy and international business literature. Based on this theory, in order to
evaluate its influence, the research examined the effect of trade openness on the profitability of Vietnamese
food processing companies over five - year period from 2013 to 2017. With the data collected from companies
in this industry in Vietnam, we used regression analysis method to show the effect of the level of trade
openness on firm profitability. However, according to our research, there is no relationship between
dependent variable (ROA, ROE) and the independent variable (openness index). In fact, there is no statistically
significant correlation between these variables.
Keywords: Food processing companies, Trade openness, Profitability.
1. Introduction
Always do managers spend a lot of attention on firm profitability, because it plays an important role in the
structure and growth of companies. As a result, it can lead to the high performance and success of an
organization. Based on enhancing the profitability, a company can also increase its reputation. Consequently,
maximizing the profits of firm becomes one in all the most goals of leaders.
There are many ways to achieve that aim, but no manager can ignore the impact of an external factor named
trade openness. In the trend of globalization, it is able to create numerous opportunities to grow for companies
through import and export activities which can easily grow their profit. Therefore, improving the trade-toGross Domestic Product (GDP) ratio can be a manner to develop the domestic economy.
Vietnam is an agricultural country, as a consequence, the food processing industry is one of top prioritized
sectors. Therefore, food processing companies have a solid ground to develop. In order to reach success and
become the backbone of Vietnamese economy, their main objective is the maximization of profit which is able
to cause the maximization of shareholders wealth. With this purpose, that Government pays attention to trade

openness is necessary. Our study focuses on the impact of openness index on their gain. Examining many
relationships can provide an overview about their capacity to create profit. Reasonable trade-to-GDP ratio
becomes especially helpful to companies considering a growth based on boosting sales, when they realize that
the production can be increased by expanding market. The goal of our research is to ascertain the relationship
between openness index and profitability in Vietnamese food processing industry.

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The hypothesis that the openness index does significantly impact on the level of profit of food processing
sector in Vietnam. The H2 there is no significant relationship between openness index and profitability.
2. Literature review
2.1. Concept of the relationship between international business and economic growth
Gianni De, Honohan & Ize (2003) defined international business as business activities across the frontiers
that is with the rest of the world. Therefore, it can play an important role in enhancing the economic growth
at large, and productivity in particular. Historical validation has showed that countries having internationally
actives are prone to be more productive than countries which rely only on the domestic market. However, its
benefits for economic growth and development are difficult to estimate. These authors found out that
international business deals with the economic and financial interdependences in economic and financial
activities among countries. In addition, international business is integral for shaping economic and social
performance and prospects of nations around the world, particularly those of developing countries.
Nevertheless, there are also a lot of risks in business activities across the frontiers, including economic risk,
political risk, country buyer and seller risk, commercial risk, culture difference, lack of knowledge, overseas
markets, language barriers corruption in business and natural risks, which create the problems for the
foreigner investors and firms’ leaders. Consequently, the influence of international on growth has been being
debatable.
Economic globalization is the integration process of numerous economies of the world where any
hindrances in the free flow of goods and services, technology, capital and even labor or human capital is
eliminated (Sonia and Rajeev, 2009). With the international business, individual firms and corporate
organizations can transact businesses worldwide without restrictions.

2.2. Concept of the relationship between economic growth, profitability of firm and openness index
(Pitelis, 2003). Growth is not a purpose itself, but rather an endogenous outcome of intra-firm knowledge
generation and a means of achieving maximal possible long-run profits.
Edith Penrose (1959), in her book named “The Theory of the Growth of the Firm”, does not indicate the
discrepancy between growth and profitability into account. Her point of view is similar to a lot of previous
researches, it is that profit and growth in the long term could be seen as equivalent, and companies pursue the
growth for long-run development. However, according to Pensore, growth is not the ultimate aim of a firm.
She did not count the opportunity cost of growth, and did not consider the differences between profit and
growth.
According to Montgomery and Wernerfelt (1988), in order to reach goal of growth, comparing to expanding
product, a company should spend attention on foreign markets based on its existing product that has success
in its own country and is facing to the saturation in the current market, because new activities have a close
relation to its current activities, thus, they require only a simple replication or relatively easy extension of the
current knowledge. In other words, they can take use of existing background in acquiring new markets.
The traditional Ricardian-Hecksher-Ohlin trade theory shows that openness to international trade leads
only a one-time rise in output, but it does not suggest the long-run growth. The neoclassical growth model
points out that the long-run growth rate of per capita output is determined by the exogenous technological
progress. The newer endogenous growth theories spend attention on implications of trade openness on
growth in the long run, because openness improves the transmission of technology through providing
communication with foreign counterparts, boosting domestic resources towards more intensive research
sectors and grows market size (see Rivera-Batiz and Romer (1991) and Grossman and Helpman (1991,

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Chapters 6 and 9)). However, these models do not necessarily predict that openness results to economic
growth in all circumstances and for all countries.
Edwards (1993) and Rodrik and Rodr´ıguez (2000). The strong results in favour of openness may arise from
model misspecification and/or openness measures may be acting as a proxy for other macroeconomic policies
or other important factors such as institutions and geography. In conclusion, the cross-country studies can

suffer from lack of robust and convincing evidence on the openness-growth connection and this issue is still
highly controversial.
In a citation count of the most cited papers dealing with openness and growth published after 1992, the
four most cited papers were concerned with cross-national statistical evidence connecting trade and growth,
and all stated finding a positive association between economic integration and growth. In 2001, Dani Rodrik
and Rodríguez carried out a systematic critique of this evidence. In their point of view, the results in these
papers either derived from the fact that the openness indicators used were not appropriately measuring
openness (while more appropriate indicators in fact failed to deliver a significant association) or that the
papers in question had made questionable methodological choices. Using the same data than the authors of
these papers, they showed that correcting for these shortcomings in measurement and methods made the
significance of the results go away
Using broader databases and cross-section or panel-data estimations, Freund and Bolaky (2008) and Chang
et al. (2009) also point out that trade openness has a positive influence on income and that this positive
relationship is enhanced by complementary policies. Many different measures of trade openness have been
proposed and used in empirical analyses of the relationship between openness and growth.
As argued by Lee et al. (2004), all measures of openness are generally closely linked to the growth rate.
Hence, it is likely that all measures of openness are jointly endogenous with economic growth, which may
cause biases in estimation resulting from simultaneous or reverse causation. Various methods have been used
to remedy this problem and there is still a debate among scientists about which method is the most appropriate
(see, e.g., Dollar and Kraay, 2004; and Lee et al., 2004).
Hausmann et al. (2007) proposed an analytical framework linking the type of goods (as defined in terms of
productivity level) a country specializes in to its rate of economic growth. In order to test empirically for this
relationship, they defined an index aiming at capturing the productivity level (or the quality) of the basket of
goods exported by each country. Using various panel data estimators during the period 1962 – 2000, their
growth regression showed that countries exporting goods with higher productivity levels (or higher quality
goods) have higher growth performances. These results suggest that what countries export matters as regards
the growth effect of trade. Hence, our measurement of trade openness should consider this quality dimension
as a complement to the trade ratio (or the dependency) dimension.
On the other hand, monopolistic competition trade models with heterogeneous firms and endogenous
productivity provide theoretical support for a positive impact of trade openness on growth. Indeed, the theory

predicts a productivity improvement in the country due to the exit of less efficient firms after trade
liberalization -or a reduction in transport costs for example- (e.g., Melitz, 2003). Furthermore, a higher share
of the most productive firms will start exporting, which translates into an increase in the variety of exports.
As exporters are more productive on average than domestic firms, an increase in exports variety can be
associated to rising country productivity.
Based on this literature, Feenstra and Kee (2008) developed a model allowing to link, across countries and
over time, relative export variety to total factor productivity using a GDP function. They tested this
relationship on the basis of exports to the US for a panel of 48 countries over the period 1980-2000 using three
stages least squares regressions. Their empirical results indicated that there is a positive and significant
relationship between export variety and average productivity. Furthermore, computing the gains from trade
in the monopolistic competition model of Melitz (2003), Feenstra (2010) shows that countries with a greater
export over GDP ratio will experience higher gains in terms of GDP per capita growth, from export variety.

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Once again, these results suggest that, in addition to the trade dependency ratio, the structure of countries’
exports matters regarding the growth effect.
Andersen and Babula (2008) studied the openness-growth relationship based on looking at the channels
through which international trade affects economic growth. They consider capital accumulation and
productivity growth as two sources of growth in GDP per capita. They use studies proving that the main factor
of growth is not capital accumulation, and according to their conclusion, the influences of trade on
development mainly rely on productivity growth. In a framework where growth is conducted by innovation,
they give three factors creating the impact of international business on growth. First, trade facilitates the access
to foreign intermediate inputs and technologies. Second, trade also rises the size of market for companies,
encouraging to continually research and development to manufacture new products. Thirdly, trade allows for
sharing general knowledge across geographical boundaries, which allowing trading partners to have
information, leading to facilitating the R&D process and subsequent innovation.
Drawing from the Penrosian perspective that emphasizes the role of resources in firm growth, in 2010, Liu
Anran, with research named Organizational Slack, International Expansion, and Firm Profitability, investigates

whether and how firm slack resources influence the tradeoff between international expansion and
profitability. Particularly, author argues that there is an inverted-U shaped curvilinear link between
international expansion and firm profitability, and uses resource-based view and agency theories to
hypothesize how human and financial slacks impact the relationship. In this research, the international
expansion of Korean firms is examined. Based on the data consisting of Korean firms that were listed on the
Korea Stock Exchange (KSE) between 1995 and 2007, this study indicates an inverted-U shaped nonlinear
relationship between international expansion and firm profitability exist.
In the research “The Effect of International Business on SMEs Growth in Nigeria”, Oladimeji Moruff Sanjo,
Muhammed Olaniyi Ibrahim (2017) examined the influence of international business on SMEs growth in
Nigeria. They collected secondary from the Nigerian Bureau of Statistics and the Central Bank of Nigeria
(CBN) annual report. The study shows that trade openness and FDI have no significant effect on SMEs growth
in Nigeria. It was also revealed that the exchange rate has a significant influence on SMEs growth in Nigeria,
and the effect of exchange rate on SMEs growth is relatively strong. According to this study, the exchange rate
has a negative coefficient, in other words, the exchange rate reduces SMEs growth increases.
Moruff Sanjo Oladimeiji, Augusta Thereza, Ebodaghe, Peter Babatunde Shobayo (2017) carried out a
research named “Effect of globalization on small and medium enterprises (SMEs) performance in Nigeria”.
This paper investigates the influence of globalization on small and medium enterprises (SMEs) performance
in Nigeria. In this study, authors used the secondary statistics data from CBN bulletin on relevant information.
In order to examine the effect of globalization on SMEs performance in Nigeria, a co-integration model was
used. In addition, three proxies were used to capture the activities of globalization; consisting of interest rate,
bank credit and trade openness. Output of SMEs to GDP was considered as a tool to measure SMEs
performance from 1992 to 2014. This study shows that the variables are not significant.
3. Research Methodology
The research study is analytical in nature and involved testing of hypotheses quantitatively. The main
content of this research approach is to find out a concise answer to the research questions through the
collection and analysis of information of firms. The study is mainly based on secondary financial data
including income statements, balance sheets, and cash flow statements of listed sampled food processing firm,
the data about import and export activities, GDP collected from statistical yearbook of Vietnam, yearly report
of Ministry of Industry and Trade od Socialist Republic of Vietnam for period of 2013 to 2017. This offered an

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improved understanding of the links existing among the variables. This section of the article discusses the
corporations and variables enclosed within the study.
3.1 Sample selection:
The study uses financial data of 20 food processing listed corporations in Vietnam between 2013 and 2017,
the data about import and export activities, GDP as the sample, for instance, figures for Profit before tax, Sales,
import and export activities, GDP and others. Companies with missing data are excluded from the study.
3.2 Measurement of Variables
This study identifies key variables including dependent and independent variables that influence
profitability of Vietnamese food processing sector. Openness index is an independent variable, and we take
Earning price per share ratio, Return on equity ratio and Return on assets as measures of profitability to
represent dependent variables.
Independent Variable:
We take one variable as independent variable:
The ratio of trade to GDP (openness index) - an indicator of trade 'openness' is a result of globalization, and
trade liberalization. The indicator is defined as follows

Openness =

Import+Export
GDP

Dependent Variables:
We take three variables as dependent variables:
- Return on assets (ROA)is the value of the firm’s annual net income divided by the firm’s total assets in
book value. This ratio measure for the operating efficiency for the company based on the firm’s generated
profits from its total assets.
ROA =

Net profit after taxes
Total assets

- Return on equity (ROE) or return on capital is the ratio of net income of a business during a year to its
stockholders' equity during that year. It is a measure of gain of stockholders' investments. It shows net income
as percentage of shareholder equity. The formula to calculate return on equity is:
Net profit after taxes
ROE = Total shareholders' equity
The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share
serve as an indicator of a company's profitability. Calculated as:
- Earnings per share are generally considered to be the single most important variable in determining a
share's price. It is also a major component used to calculate the price-to-earnings valuation ratio.
EPS =

Net Income - Dividends on Preferred Stock
Average Outstanding Shares

Research question
What is the impact of openness index on firm profitability?
What is the nature of impact whether positive or negative?
Research objectives:
The main objective of this research was to examine the influence of trade openness on firm profitability.
The specific objectives of the study are:
(a) To examine the impact of trade openness in food processing sector.

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(b) To test how fast the sample firms have been able to enhance their respective level of efficiency if policies

about trade openness are improved
It is expected that this study may contribute to better understand the efficiency of trade openness for food
processing companies in an emerging market like Vietnam.
Hypothesis development:
In the light of the above discussion, the present study expects relationship between fixed assets and
profitability. The main hypotheses to be tested in this study are as follows:
H1: Openness index has an association with Return on Equity
H2: Openness index has an association with Return on Assets
H3: Openness index has an association with Earning Per Share
3.3 Research model:

Trade openness

Profitability

Return On Equity

Openness index

Return On Asset

ROA = β0 + β1Openness+ ε
ROE = β0 + β1Openness+ ε

Earning Per Share

EPS = β0 + β1Openness+ ε
ROE = Return on Equity
ROA = Return on Assets
Openness = Openness index

α = Constant Term
β = Coefficient Term
ε = Error term
4. Data analysis and Discussion
4.1. Descriptive statistics

The table 1 shows the mean value of the variable return on asset is around 5 percent and return on equity
is around 7.2 percent with standard deviation of 0.098 and 0.356 respectively; the mean value for openness
index in that period is about 170%.

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Table 1: Descriptive Statistics
Openness
ROA
ROE
EPS
Valid N (listwise)

N
100
100
100
100
100

Minimum
1.54
-.19

-1.29
-9581.00

Maximum
1.98
.79
.65
11497.00

Mean
1.7096
.0508
.0726
1999.8400

Std. Deviation
.15245
.09850
.21417
2796.43898

4.2. Correlation between cash conversion cycle and profitability ratios
The Sig.(2-tailed) value tells if there is a statistically significant correlation between two variables. In
comparing trade openness from firm’s profitability, research compares openness index as the trade openness,
earning per share (EPS), returns on assets (ROA), returns on equity (ROE) as firm’s profitability. As can be
seen from the table 2, the sig.(2-tailed) value between Openness index and ROA is .335, the value between
Openness index and ROE is .853, and the value between Openness index and EPS is .343. That result means
that there is no statistically significant correlation between Openness index and ROA, ROE or EPS. In other
words, there is no statistically significant correlation between Trade openness and Profitability of Vietnamese
food processing companies from 2013 to 2017.

Tabe 2: Correlations
Openness
1

Pearson Correlation
Sig. (2-tailed)
N
100
Pearson Correlation
-.093
ROA
Sig. (2-tailed)
.355
N
100
Pearson Correlation
-.019
ROE
Sig. (2-tailed)
.853
N
100
Pearson Correlation
-.096
EPS
Sig. (2-tailed)
.343
N
100
**. Correlation is significant at the 0.01 level (2-tailed).

Openness

ROA
-.093
.355
100
1
100
.485**
.000
100
.590**
.000
100

ROE
-.019
.853
100
.485**
.000
100
1
100
.709**
.000
100

EPS
-.096

.343
100
.590**
.000
100
.709**
.000
100
1
100

5. Conclusion
This paper studied the impact of trade openness on profitability in twenty Vietnam’s food processing
companies in the period of 2013 to 2017. Results showed that, there is no significant correlation between Trade
openness and Profitability of Vietnamese food processing companies from 2013 to 2017. In other words, the
theory about the effect of trade openness on firm’s profitability is not suitable for Vietnamese food processing
companies in that period.
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