The impact of loans to small and medium enterprises, the case study of vietnam

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – NETHERLANDS
PROGRAMME FOR M.A IN
DEVELOPMENT ECONOMICS

THE
IMPACT
OF
LOANS
TO
SMALL AND
MEDIUM
ENTERPRISES:
THE CASE
STUDY OF
VIET NAM

By
BUI
THI
HONG
CHINH

MASTER OF ARTS IN
DEVELOPMENT
ECONOMICS

Ho Chi Minh
City,
January
2018

i


UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – NETHERLANDS
PROGRAMME FOR M.A IN
DEVELOPMENT ECONOMICS

THE IMPACT OF LOANS
TO
SMALL AND MEDIUM
ENTERPRISES:
THE CASE
STUDY OF

VIET NAM

By
BUI THI HONG CHINH

Supervisor
Dr. NGUYEN THI THUY
LINH


Ho Chi Minh
City, January
2018

ii


ACKNOWLEDGEMENT
This process of writing a thesis is a collaborative experience involving the
support and helps from many people. I want to express my gratitude to those who
give me the tremendous support to complete this thesis.
First of all, I would like to thank gratefully to my supervisor Dr. Nguyen Thi
Thuy Linh. I cannot finish my thesis if do not get the support and the advice from
her.
Beside that, I want to thank to Dr. Pham Khanh Nam who give me many
useful and important advice that help me very much through the time I do the thesis.
Moreover, I want to thank Dr. Truong Dang Thuy who helps me answer
questions when I need it.
And I want to thank the professors and the teacher staff of Viet Nam – Netherlands Program that gave many supports to me to have the knowledge, to solve the
difficult problems in my studying process.

Last, I want to thank my closet friends and my family.

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ABBREVIATIONS
SME

Small and Medium Enterprise

RD

Regression Discontinuity Design

PSM

Propensity Score Matching

DD

Method Difference in difference

VIF

Variance inflation factor

IV

Instrumental variable

HET

Heteroscedasticity

SOE

State Owned Enterprise

OECD

Organization for Economic Co-operation and Development

DNNN

State enterprises

NHNN

State Bank

NHTM

Commercial Bank

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ABSTRACT
After a period of growth and affected by the crisis, Vietnam's economy has decreased. Hundreds of thousands of small and medium-sized enterprises went bankrupt and shut down. Loan is a solution for business to expand scale, increase sales
and profits, but it can create jobs, increase salaries to improve social welfare or not?

To verify that argument, the author uses the PSM method and combines with DD on
the SME data set from 2009 to 2013 to more accurately assess the impact of the
loans.
The results show that loans do not have the effect of improving employee incomes, as well as creating more jobs. In addition, the loans from informal sources
with low cost do not help enterprises to expand their operations because of the small
scale. Loans from official sources are large scale, but the high costs overwhelm
profits. Moreover, the impact of formal loans also causes businesses to reduce their
jobs. The topic also shows other factors such as export, type of ownership, scale,
production technique, entrepreneurial qualification that affects to employment and
wage.

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TABLE OF CONTENTS
ACKNOWLEDGEMENT.................................................................................................................. III
ABBREVIATIONS.............................................................................................................................. IV
ABSTRACT............................................................................................................................................ V
CHAPTER 1: INTRODUCTION........................................................................................................ 1
1.1 PROBLEM STATEMENT.................................................................................................................. 1
1.2.1 Research objectives
............................................................................................................................................................

2
1.2.2 Main research question
............................................................................................................................................................

3
CHAPTER 2: LITERATURE REVIEW............................................................................................ 4
2.1 REVIEW OF THEORY........................................................................................................................ 4

2.1.1 Definition of small and medium enterprises and types of credits.
4
2.1.2 The impact of loans to employee from producer theory
............................................................................................................................................................

4
2.1.3 Factors affecting the operation of the business
............................................................................................................................................................

8
2.2 REVIEW OF EMPIRICAL STUDIES................................................................................................ 10
2.2.1 Impact of loan to SMEs in Viet Nam
..........................................................................................................................................................

10
2.2.2 Previous researches
..........................................................................................................................................................

12
2.3 SUMMARY..................................................................................................................................... 13
CHAPTER 3: RESEARCH METHODOLOGY........................................................................... 14
3.1 ANALYTICAL FRAMEWORK.......................................................................................................... 14
3.2 ECONOMETRICS MODELS............................................................................................................. 15
3.2.1 Impact assessment methodology
..........................................................................................................................................................

15
3.2.2 Research proposal and select model

..........................................................................................................................................................

18
3.2.3 Dependent variables
..........................................................................................................................................................

21
3.2.4 Independent variables
..........................................................................................................................................................

21
3.3 DATA.............................................................................................................................................. 24
CHAPTER 4: RESEARCH RESULTS............................................................................................ 25
4.1 OVERVIEW OF THE RESEARCH TOPIC.......................................................................................... 25
4.2 DESCRIPTIVE STATISTICS............................................................................................................. 28

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4.3 REGRESSION RESULTS.................................................................................................................. 30
4.3.1 OLS regression results
..........................................................................................................................................................

30
4.3.2 PSM combined with DD results
..........................................................................................................................................................

32
4.3.3 Verification of model stability
..........................................................................................................................................................

41
4.4 DICUSSIONS................................................................................................................................... 42
CHAPTER 5: CONCLUSIONS AND POLICY IMPLICATIONS.......................................... 47
5.1 CONCLUSIONS............................................................................................................................... 47
5.2 POLICY IMPLICATIONS.................................................................................................................. 48
5.3 LIMITS OF THE STUDY.................................................................................................................. 49
REFERENCES...................................................................................................................................... 50
APPENDICES....................................................................................................................................... 55
APPENDICES 1: DIVIDE THE SIZE OF THE BUSINESS......................................................................... 55
APPENDICES 2. INFLATION AND PRICE INDEX VND (1994=1)..................................................... 56
APPENDICES 3. INFLATION AND PRICE INDEX VND (1994=1) (CONT)....................................... 56
APPENDICES 4. IMPACT ASSESSMENT BY MATHEMATICAL METHOD.............................................. 57
APPENDICES 5. GROUPS WERE DEVIDED BY PSM METHOD.......................................................... 58
APPENDICES 6. REGRESSION DISCONTINUITY DESIGN - RD....................................................... 59
APPENDICES 7. INSTRUMENTAL VARIABLE - IV.............................................................................. 60
APPENDICES 8. DEFINITION OF SOME VARIABLES........................................................................... 61
APPENDICES 9. DESCRIPTIVE STATISTICS......................................................................................... 62
APPENDICES 10. ANALYSIS OF CORRELATION BETWEEN QUANTITATIVE VARIABLES..................64


vii


LIST OF TABLE
TABLE 3.1 DESCRIPTION AND MEASUREMENT VARIABLES.....................................................22
TABLE 4.1 DATA STATISTICS...............................................................................................................25
TABLE 4.2 STATISTICS DESCRIBE THE PARTICIPANTS AND THE CONTROL GROUPS
BEFORE THE LOAN................................................................................................................................28
TABLE 4.3 IMPACT OF LOAN TO SMALL AND MEDIUM ENTERPRISES- BASIC MODEL ..

31

TABLE 4.4 REGRESSION MODEL OF THE LOANS TO SME..........................................................32
TABLE 4.5 TREND POINT OF GENERAL SUPPORT AREA.............................................................34
TABLE 4.6 IMPACT OF LOANS TO SME ON THE LABOUR COSTS..............................................35
TABLE 4.7 IMPACT OF LOANS TO SME ON THE NUMBER OF EMPLOYEES............................37
TABLE 4.8 IMPACT OF EACH TYPE TO SME ON THE LABOUR COSTS.....................................38
TABLE 4.9 IMPACT OF EACH TYPE TO SME ON THE NUMBER OF EMPLOYEES...................40
TABLE 4.10 INVESTMENT AND LABOUR........................................................................................42
TABLE 4.11 THE SCALE OF THE MOST IMPORTANT LOAN........................................................43

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LIST OF FIGURE

Figure 2.1 Illustration of the impact of loan to SMEs………………………………5
Figure 2.2 Optimal coordination of production factors when loan increases…….…6
Figure 3.1 Impact of loans to SMEs when enterprises participate and do not join in
loans………………………………………………………………………….…….15
Figure 3.2 Impact assessment by DD method………………………………...… 18
Figure 3.3 Illustrate the general support area and the observation area discarded
with PSM……………………………………………………………………..……19
Figure 4.1 The supply of formal credit………………………………………….…26
Figure 4.2 The supply of informal credit………………………………………….27
Figure 4.3 The biggest difficulties prevent the development of SMEs……………44

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CHAPTER 1: INTRODUCTION
1.1 Problem statement
Vietnam's economy from 2008 to 2015 has more volatile due to the impact of
the financial crisis of the world and the domestic country. High inflation in 2008,
2010 and 2011 are over two figure (Appendices 2, 3); that makes the government
offer the methods to cut public investment, to be macroeconomic stability, to decrease inflation … These policies contribute to economic growth mainly relies on
investment. To prevent a recession, the government launched stimulus packages
such as the 4% interest rate subsidy to 17,000 billion in 2009, preferential loans to
buy houses, but not restore the economy, resulting in 600,000 registered businesses
officially only 380,000 active businesses (Truong Tan Sang, 2013). To statistics of
Department of business registration management in 2016, the number of bankrupt
enterprises 1.3 times in 2010, mostly small and medium-sized enterprises (SMEs)
for 10 months in 2015.
The giant state-owned corporations enjoy too many privileges but inefficient operations were restructured, foreign investment (FDI) has not restored as expected
economy, cooperative economy is slow and efficiency is not much. At this time, the
SME is the most emphasis. The SMEs bankrupt, dissolute too much to be explained
by the macro-economy, made SMEs difficult to search their market, difficult to access to loans (VCCI, 2015). The dissolution of a series of enterprises affects the social security issues such as GDP, consumption, unemployment, price indexes ... because Vietnam has a large stock of human resources, of which SMEs account for 96,
4% of the total number of enterprises in the country (ADB, 2014). By the end of
2013, Viet Nam had a total of 359,794 SMEs, accounting for 5.1 million workers,
accounting for 46.8% of the nation's labor force (ADB, 2014). Vietnam needs more
and more sustainable SMEs in a competitive environment. To do that, the State
needs appropriate support measures, first of all to exist, then to expand, thereby cre-

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ating jobs and increasing laborers' incomes and solve the macroeconomics of the
country.

According to many economists, loan is very important problem, even the leading factor to support SMEs (ADB, 2014, Tran Hoang Ngan, 2015). Referring to
SMEs, the first thing to mention is difficult access to credit and the need to remove
barriers to accessing credit (Tran Dinh Thien et al., 2015). Many economists have
traditionally believed that loan is the key to help SMEs better function. The policies
promulgated by the State such as the establishment of the SME Development Fund,
the application of the ceiling lending interest rate, the expectation of SME development to increase incomes, create jobs for employees.
In fact, there is little research to quantify the impact of loans to SMEs by experiment. Moreover, the performance evaluation of SMEs does not clearly distinguish
between growth and development. The growth of SMEs is measured by the increase
in revenue and profit. The development of SMEs involves equitable growth and distribution of results in a relatively fair way, which helps business owners and workers achieved benefit. On the other hand, the development of SMEs is reflected in an
increase in the wage index and employment. This topic explores the impact of loan
on the costs that an enterprise invests in employees and the impact on their wages
and employment from formal or informal loans; after that, provide appropriate policy recommendations for small and medium enterprises. That is why the study titled
"Impact of loans to employee in small and medium enterprises" in order to clarify
the issue: loan to employee in SMEs is the solution to social security, isn't it? On the
other hand, the topic seeks the impact of loan on development through the wage
index, employment at the enterprise micro level.
1.2 Research objectives
1.2.1 Research objectives

2


This study determines the relationship between loans and number of employees,
wages in small and medium enterprises. From that, research offers the policy implications to improve the activity of business.
1.2.2 Main research question
Does the loan to SMEs impact on the labour costs?
Does the loan to SMEs impact on the number of employees?
Does the each type of credit to small and medium enterprises impact on the labour
costs and the number of employees?
1.3 Scope of study

This thesis investigates the impact of loan to employee on the number of employees
and the labour costs by using the dataset of Survey of Small and Medium Enterprises which is done by the Central Institute for Economic Management and partner.
The data is collected from 2009 to 2013 due to its availability.
The methods will be applied in this study is descriptive statistics, OLS regression,
Propensity Score Matching Method (PSM) combined with Difference in Difference
(DD), accuracy test of model.
1.4 Structure of the thesis
This thesis consists of five main chapters. Chapter one is introduction. Chapter two
is literature review, including review of theory and review of empirical studies that
related to the impact of loan to employee in SMEs. Chapter three is research methodology; in this chapter will be present about analytical framework and the methodology, variable measure, descriptive statistics to dataset. Chapter four is research
results, including overview of the research topic, descriptive statistics, results and
dicussions. Chapter five is conclusions and policy implications in addition that is
limits of the study.

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CHAPTER 2: LITERATURE REVIEW
2.1 Review of theory
Chapter 2 presents theories concerning the impact of loan capital on labor in
small and medium enterprises. In Section 2.1 is Review of theory, which includes
definitions and the impact of the factors seen from the manufacturer's theory. Section 2.2 is a review of empirical studies, including Loans to SMEs in Viet Nam and
other relevant studies. Section 2.4 is summary of chapter 2.
2.1.1 Definition of small and medium enterprises and types of credits.
There are many ways to classify enterprise with the criteria related to the number of full-time, part-time and non-permanent employees, World Bank definite
about the scales of enterprises such as: microenterprises scale from 1 to 9 employees; small businesses with 10 to 49 employees; medium-sized businesses with 50 to
299 employees; large enterprises with 300 employees or more. In Viet Nam, there is
distinction by industry. Decree 90/2001/ND-CP and 56/2009/ND-CP said that small
businesses from 10 to 200 employees, medium businesses with 200 to 300 employees in all industries except trade and services (Appendice 1).
Capital (K) is understood as the inputs for production serves as machinery,

equipment, land .., or financial capital. It is mobilized from various sources. According to this approach, capital and loan are understood to be identical.
Formal credit is the credit that is provided by financial intermediaries who have
the function of lending, mobilizing and lending in a clear and transparent manner.
Informal credit is a credit that is provided by financial intermediaries who do not
have the function of lending. It exists mainly in the form of private loans with high
interest rates and asymmetric information.
2.1.2 The impact of loans to employee from producer theory
Loans do not directly develop businesses. This financial source will be allocated
through investment in inputs such as workshop, equipment, machinery, technology,

4


human resources, then expand production and business activity to increase sales,
profitability and scale expansion (Nguyen Kim Anh et al, 2011). When businesses
invest resources, they will hire more labours, pay more wages (Figure 2.1).
Figure 2.1 Illustration of the impact of loans to SMEs

Investment - Production
+ Many opportunities to invest.

+ Increase

+ Increase Ability to invest

in income

+ Increase investment by using better

for workers.

technology

+ Increase

Increas-

+ Create opportunities to expand the

Employment

ing of

small businesses

loans

+ Increase

+ Diversification of economic activities

re-sources.

+ Enhance profitability from investment

Source: Nguyen Kim Anh et al (2011)
According to producer theory, enterprises operate on the principle of minimizing
production costs. When loans increased, that is described as follows:
Suppose the production function of enterprise is Q = f (K, L) with the output Q.
Q is dependent on the inputs (capital K, labor L and other factors). The underlying

assumption to producer theory is the minimum cost of inputs, denoted C. The next
important assumption is the marginal productivity of capital (MPK=

∂f
∂

) and Mar-

K

ginal productivity of labours (MPL=
With capital cost is called “r”, and labor costs (including wages, insurance,
training ...) denoted w. The cost minimization problem is rewritten:

5


Min C (K, L) = r*K + w*L
When output Q0 is unchanged:
f (K, L) = Q0
Optimizing the amount of capital and labor input of business, K and L to minimize (2.1) with constraints (2.2). Lagrange multiplier method is applied to solve the
problem, Lagrange equations:
Z = f (K, L) + λ (w*L + r*K - C)
Partial of Z to the variables K, L and λ is zero:
(2.4)
(2.5)
(2.6)
With MPK=

∂f

∂
K

(2.4): (2.5), we have:

and MPL=

(2.7)


6


Figure 2.2 The optimal coordination of production factors when loan increases
K

Q1 credit

Credit + C0

Q2 credit
Long-term scale

r

Q0
K2
C0/r

Short-term scale

K0

0

C /w

L0

0

L2

L1

Credit + C0

w

L

Source: Simulation Pindyck, Robert S. and Daniel L. Rubinfeld (2013), Graph
7.8, page 253.
With C0 initial resources, business rearchs maximize productivity at output Q 0
with input K0 and L0.
In the short term, the business is difficult to minimize costs because of the fixedness of capital elements. So, when the capital increases, resources will be Credit +
C0, production increases into Q1 credit, hiring more workers at L1.
In the long term, businesses will adjust both the K and L, so that the marginal
cost per unit of production increased from the addition of one labour equals marginal cost per unit of production increased from the addition of one unit of capital.
From equation (2.7):

(2.8)
K

7


So, in the long term, the business can invest more capital at K 2 and labour at L2,
but the best situation: minimize the cost with optimal output is Q2credit.
Theoretically, businesses will use the loan to expand their production by more
investing in the number of employees; and with fixed wage, the cost of labour is
higher. From the theory above, the subject will focus on two hypotheses:
H1.1: Loans have a positive impact on the labour costs in SMEs
H1.2: Loans have a positive impact on the number of employees in SMEs.
H2.1 Formal and informal credit have a positive impact on the labour costs in
SMEs.
H2.2 Formal and informal credit have a positive impact on the number of employees in SMEs.
2.1.3 Factors affecting the operation of the business
The subject of the study is the impact of loan to small and medium enterprise in
Viet Nam, in other words, the causal relationship of the loan to the salary and employment of SMEs based on the producer theory. Businesses that take the initiative
to loan may be different from a business that does not actively loan to expand production. Without a loan, businesses will use capital more efficiently, but using more
labour. The number of employees and salaries are influenced by many other factors,
and loan is just one of many factors. The study identifies a number of factors that
influence wages and employment, loan firms that have the potential to bias the impact of loans:
Labour productivity: The economist said that the business want to increase salaries for employees, they must increase labour productivity. If labour productivity
does not increase, but wages rise. That will cause capital deficits because production costs increase.

8


Property: It is one of the most visible information about the business. Business

credit is limited by lack of collateral (Gertler and Gilchrist, 1991).
Years of business: In Vietnam, the age of a business influences the viability and
development of that business (Hansen et al., 2009). Bentolila et al. (2013) concluded that age affects labour in the enterprise. Because businesses connect to many
sources, including financial institutions. Therefore, the ability to loan is easy than
newly established enterprises.
Ownership form: each type of business, salary policy and recruitment will be
different. Type of enterprise affecting the participation of preferential interest rate
package (Dinh Tuan Minh et al., 2010). Foreign ownership influences the efficiency
as well as the ability of SMEs to join the international production network (Harvie,
2010).
Characteristics group of the industry: Each industry produces different products,
so the combination of capital and labor is different (Bentolila et al, 2013). The complex careers require skilled labor, and are highly paid. High profit industries are
more accessible to financial sources. Different technological levels approach different credit guarantees (Oh, Inha, et al, 2009).
Market Size: The ups and downs of the macro economy affect the size of the
business. Enterprises operating in the export sector are more likely to have access to
credit than in the domestic market (Dinh Tuan Minh et al., 2010).
Characterized group by size: Large firms that approach banks or formal financial institutions are easier than small businesses (Harvie, 2010). In Asia, companies
depend on banks are mainly large companies (Claessens et al, 2000). Medium-sized
firms have access to a much higher interest rate subsidy package than microenterprises (Signore, 2015). Enterprise size is one of the factors affecting the business
performance of Vietnamese enterprises (Ari Kokko and Fredrik Sjoholm, 2004;
Hansen et al, 2009).

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Financial capacity: It is also considered by many economists to be characterized
by its size (Ramanathan, 2002).In a market economy, financial capacity is not only
from own capital but also from loan sources. So besides finance, loans also affect
the employee in the business.
Regional characteristics: Input and output markets for enterprises are as near as

possible, the more accessible the business is, the less time and expense for the business. Urban enterprises in the South have significantly higher investment probabilities than those in the North and rural enterprises (CIEM, 2014), but urban enterprises are less likely to survive than rural (Hansen et al, 2009).
When studying SME, it is difficult to identify microenterprises with the characteristics of a household (Hulme, 2000). Therefore, the characteristic of the business
owner (sometimes also the household head) has an important role in all household
business activities.
2.2 Review of empirical studies
2.2.1 Impact of loan to SMEs in Viet Nam
With market failures affect the operation of SMEs, the State needs to intervene
to help SMEs develop sustainably, create jobs for workers, increase wages and increase social welfare. The reasons which for the State intervene in supporting SMEs
were summarized by the World Bank in 2004:
Incomplete information: Information asymmetry makes the market failure
and financial institution problems, hindering the development of SMEs. The solution is to improve institutions, improve financial markets, and provide direct financing from government for SMEs to promote growth and development.
Positive External: SME loan will help to improve competitiveness and entrepreneurship. The growth of SMEs makes the economy change about effectiveness
and productivity, and increases in social welfare from the increased benefits of
competition.

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