The role of family involvement in a firm’s performance

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM –NETHERLAND PROGRAMME
FOR MA IN DEVELOPMENT ECONOMICS

THE ROLE OF FAMILY INVOLVEMENT
IN A FIRM’S PERFORMANCE

Academic Supervisor: DR. LE VAN CHON
Student:

NGUYEN QUOC KHANH

HO CHI MINH CITY, OCTOBER 2013


ACKNOWLEGDEMENTS
During doing research, I have received the supports, helps and guidance from my supervisor,
committee members, friends and family.

First of all, I really appreciate and thank to the enthusiastic help of my supervisor - Dr. Le Van
Chon. I always get clearly instructions, heartfelt encouragements and enthusiastic assistances
from him during my thesis. I also would like to thank Dr. Pham Khanh Nam to suggest me the
ideas for my thesis and supply the data source for the analysis in my research. I would like to
express my great appreciation to Associate Prof. Dr. Nguyen Trong Hoai – Vice Principal of the
University of Economics & Director of Vietnam – Netherlands Programme for MA in

Development Economic who oriented and facilitated me during two years learning this master
course.

Finally, I would like to express my heartfelt gratitude to my family, my friends and my
colleagues who supports, and encourage me to finish this research.

Ho Chi Minh City, October 2013

ii


ABSTRACT
This paper investigates the difference in performance between family businesses and non
family businesses of small and medium enterprises (SMEs) in Vietnam. It focuses on the
differences in how the use of capital and labor and in total factor productivity (TFP) between the
two types of firms. The study used statistics on small and medium enterprises in Vietnam over
the years 2005, 2007 and 2009.This paper also gives a number of policy implications for small
and medium businesses to improve their performance and for the policy-maker to support the
Vietnam small and medium enterprises. Based on the Cobb-Douglas production function, we
apply the methods OLS, GLS and panel model to estimate. It finds that there are significant
differences in the contribution of the two inputs that are labor and capital to output – the value
added- between family businesses and non family businesses in Vietnam. On labor, its
contribution to output in the family businesses was significantly higher than non-family
businesses. In terms of capital, the contribution of this factor in the family business is low
compared to their counterparts. Moreover, there are no bases to conclude which kind of firm is
more productivity.

iii

TABLE OF CONTENTS
ACKNOWLEDGEMENTS………………………………………………………………………ii
ABSTRACT……………………………………………………………………………………...iii
TABLE OF CONTENTS………………………………………………………………………...iv
LIST OF TABLES……………………………………………………………………………….vi
LIST OF FIGURES……………………………………………………………………………..vii
CHAPTER I INTRODUCTION
1.1 Problem statement…………………………………………………………………………….1
1.2 Research objectives……………………………………………………………………….......2
1.4 Scope of study and data………………………………………………………………………2
1.5 Thesis structure……………………………………………………………………………….2
CHAPTER II LITERATURE REVIEW
2.1 What is family business? .................…………………………………………………………3
2.2 Differences between family and non-family businesses ……………………….....................5
2.3 The performance of family and non-family firms……………………………………………7
2.4 The importance of the family firm…………………………………………………………..13
2.5 The other determinants of firm's performance………………………………………………14
2.6 Conceptual framework………………………………………………………………………15
CHAPTER III RESEARCH METHODOLOGY
3.1 The development of Domestic Private sector and

Small and Medium Enterprises in Vietnam…………………………………………………....16
3.2 The recent performance of Small and Medium Enterprises in Vietnam…………...………19
3.3 Sources of data…………………………………………………………………..…………20
3.4 Research methodology……………………………………………………………………..21
3.5. Variable treatment………………………………………………………………………....22

iv

CHAPTER IV EMPIRICAL RESULTS
4.1 Descriptive statistics……………………………………………………………………….22
4.2 Empirical Results ………………………………………………………………………….34
CHAPTER V CONCLUSION……………………………………………………………....41
REFERENCES
APPENDIX

v


LIST OF TABLES
Table 2.1: Summary of Empirical Review on the performance difference between family firms
and their counterparts……………………………………………………………….....................9
Table 3.1: Number and ownership structure of Vietnamese enterprises 2000-2008…………….16
Table 3.2: Vietnamese SMEs’ share in different ownership type …………………..…………..17
Table 3.3: The number and ownership structure of Vietnamese Small and Medium Enterprises
period 2000-2008………………………………………………………………………………...18
Table 3.4: Variables used in the Production Function………………………………………......25
Table 4.1: Summary Statistic for SMEs sample (2005-2009)…………………………………...32
Table 4.2: Correlation Table……………………………………………………………………..33
Table 4.3: The firm production function by OLS and GLS method with homogenous input.....34
Table 4.4: The firm production function by OLS and
GLS method with heterogeneous input…………………………………………………………35
Table 4.5: The firm production function estimation in pool data……………………………….37
Table 4.6: The firm production function estimation in panel fixed-effects……………………..37
Table 4.7: The firm production function estimation in panel random-effects…………………..38
Table 4.8: Hausman Test for Fixed or Random Effects………………………………………...39

vi

LIST OF FIGURES
Figure 2.1: The long-term view of family-business performance………………………………..7
Figure 2.2: Empirical framework………………………………………………………………..15
Figure 4.1: The probability density function histogram of variables through years
Log Value Add………………………………………………………………………………….27
Figure 4.2: The scatter-plot of log value add on variables of family and
non-family firms through years…………………………………………………………………28

vii


CHAPTER I
INTRODUCTION
1.1 Problem statement
The impact of the family involvement on the firm performance has been debated in many
researches for a long time. Many scholars have concerned the difference between family and
non-family business performance. However, the results of researches are not congruent due to
the difference of the family firm definition, performance measurement or the samples. So the
issues about the “family effect” or “family involvement” impact on the productivity and firm
performance are continued.
The role of the small and medium-sized enterprises (SMEs) is crucial in the developing
economy for the goal of economic growth and integration like Vietnam. The issues
concerning to SMEs have received increased attention of several economists. For example,
CIEM (2010) investigates the characteristics of the SMEs, the government policies and the
business environment in Vietnam. The significance of innovation for exporting of SMEs has
been studied by Nguyen Ngoc Anh et al (2008). In addition, Le Van Khoa (2006) considers
the environment pollution problems caused by the SMEs in the Ho Chi Minh city. In 2009,
the firm recognized as family firm in the total number of the SMEs in Vietnam is large that
more than 60 percent (CIEM, 2010). However, there is lack of studies investigating the

differences of family and non-family firms. More specifically, no research on the impact of
the family ownership on the firm productivity for the case of Vietnam has been established.
In this paper, we consider how the family ownership impacts to the firm productivity in
Vietnam, making it different to the non-family ones.
The Cobb Douglas is usually utilized to evaluate the firm output between family and nonfamily counterpart such as work by Bosworth and Londes (2002), Barth et al (2005),
Martikainen (2009) that indicate ambiguous relationship. To interpret to the difference, F.
Barbera, K. Moores (2011) argued that assuming the homogeneity of factor elasticity lead to
different result, then two main factors in the production function-labor and capital- contribute
to the output differently
1


1.2 Research objectives
The objective of this study aims to find out how the difference, between family and nonfamily firms, in using labor and capital affects the SMEs’ output and the difference in the
total factor productivity (TFP) between two types of firms. In addition to this, the paper also
examines the other determinants that influence to the SMEs’ output and suggests some
recommendations for firms to improve their performance.

1.3 Research question
This study tries to answer whether the family involvement has any impacts on the
performance of the small and medium sized enterprises for the case of Vietnam.

1.4 Scope of study and data
Based on the production function Cobb-Douglas, this study applies the OLS and panel
data to examine the factors affecting the firms’ output. The panel data is utilized to solve the
heterogeneity problem and to control the omitted variables of each individual. It uses the data
of small and medium enterprise surveys for the year 2005, 2007 and 2009 by the World
Institute for Development Economics Research, the University of Copenhagen and some
government agencies and bodies of Vietnam. It contains the information of more than 2000
SMEs concerning the characteristic of the Vietnam business environment and of the firms.

1.5. Thesis structure
Following the introduction chapter, the paper is organized as followed. Chapter Two
gives some literature reviews and empirical studies that provide the rational for the firm
performance difference between family and non-family firms. Chapter Three presents the
research methodology. Chapter Four provides the descriptive statistics and the result. The last
discuss the conclusion and some recommendations.

2


CHAPTER II
LITERATURE REVIEW
This chapter by reviewing previous studies firstly provides the most frequently used
definition of the family business. Then it indicates the difference between family and non-family
firm in using resources. Next it points out the differences in performance between the two types
of firms and the importance of family businesses in the economy. In addition to using the
resources and family involvement that impact to the firm performance, a number of other factors
are also considered to build the conceptual framework for the next chapter.
2.1. What is family business?
Recent researchers have paid much attention on the difference in performance between
family and non-family firm such as Gallo, (1995); McConaughy et al., (1999); Westhead et al.,
(1998) and Anderson et al., (2003). However, what is the family business? It has been the
controversy issue for many authors to find out the clarity definition, although they have agreed
on the view that the family business involvement is the factor make the firm different from
others (Miller & Rice, 1967). Westhead et al., (1998), reviewing and investigating previous
researches on the family firms, found that there are differences in the family definition used in
studies. According to Chrisman et al., (2003b), the work for family definition is continued.
Diversified definitions are given basing on different methods.. Shanker et al., (1996) gave
two definitions for family-firm, the narrow one concerning to the daily business and the broad
one regarding to strategic decision. Astrachan et al., (2002) used factors regarding to experience,

power and culture to measure the influence level of family on the firm. Some authors based on
the essence of the a family firm such as Davis et al. , (1989); Shanker et al., (1996) to investigate
the impact of family on making decision. The concept “familiness” was first introduced by
Habbershon et al., (1997) concerning to the resources of a family firm that originated in the
systems of business, of family or individuals in family. Habbershon et al., (2003) state that
“familiness” can bring competitive advantage to the family firm.

3


According to Chrisman et al., (1999) and Chrisman et al., (2003b) , the most used
definition for family business empirical studies is based on two significant components that are
ownership, management or business succession. For example, the families firms are the ones that
the ownership is concentrated by single family and/or have the influence on management process
(Gallo & Svenn 1991,; Holland & Oliver 1992). So many previous have not find the convergence
on the business family definition since the difference of the type of management, control and
ownership lead to several definitions. In addition to this, according to Chua, Chrisman & Sharma
(1999), the definition based on ownership and management does not reflect the essence of family
business that are the firm’s vision and the intention to shape and pursue that vision of the family,
small group of family or across the generation of the family
Since disadvantage of the definition regarding to the ownership and management, the
other dimension is added based on the behavior perspective (Litz 1997; Daily and Dolliger
1993). According to Chua, Chrisman & Sharma (1999) confirms that the behavior dimension is
more useful, give more clearly definition and better than ownership and management basement.
So Chua et al. (1999) give the definition that: “A family business is a business governed and
managed with the intention to shape and pursue the vision of the business held by the dominant
coalition controlled by members of the same family in the manner that is potentially sustainable
across generations.”
Based on this approach, the significant difference between family and non-family firm is
the behavior. According to the Martikainen et al. (2009) and Moore (2011), the difference in the

behavior leads to the difference of utilizing the inputs such as labor and capital between family
and non-family firm. Steers (1982) stated that the firm performance is determined by the
efficiency of using the resources. So the contributions of labor and capital to the output between
two kinds of firm are divergent, and the family involvement has impact in the resource input. In
order to investigate the contribution of inputs to output, the production function Cobb-Douglas is
used in many studies. Moore (2011) argues that assumption of the homogenous contribution of
input factors applied in previous researches (Wall 1998; Bosworth and Loudes 2002; Barth et al.
2005) seems to give controversy result, then the study assumed the factor elasticity of labor and
capital to total output are different like the work of Martikainen et al. (2009). So what lead to
4


differences in using resources between two types of firms, the next section will explain the
reasons by reviewing some related researches.
2.2. Differences between family and non-family businesses
The family businesses have the family goals that differ from the counterparts’ and they
comes from the “familiness” or the “family involvement”- the concept given by Habbershon et
al., 1999 and Habbershon et al., 2003b. According to Demsetz and Lehn (1985), the family
business focused on long-term horizon such as transferring to the next generation. The owner of
the family firm considers the family goal more important than pecuniary goal, comparing to the
owners of non-family firm (Lee et al., 1996). The non- pecuniary objective is the significant
factor to make the decision in the family business (Stanfford et al. 1999). Nicholas Kachaner et
al., (2012) also pointed out that the family business focused on non-target pecuniary target like
building corporate culture, investment in people and maintaining the operation of businesses in
difficult times. Moreover, the family firms have some quite different problems relating to family
that make the resource usage different from the non-family firms (Lester et al., 2006)
The family involvement in the family- businesses brings them some competitive
advantage that the others cannot have easily. The advantages in resource acquisitions come from
the combination of family and business factor in the family firm (Aldrich et al., 2003; Stewart,
2003). Sirmon et al., (2003) stated that the “family firm capital”, that includes human, social,

survivability, patient and governance structures, is different from of the counterpart in origin,
salvage and usage. Another advantage is the fast spread of information through members in the
family that makes household business recognize and seize the opportunities better (Barney et al.,
2002)
Reviewing the operation of the family business in the previous researches, it seems to use
less capital resource than the non-family ones. The family firms are not interesting in risky
investment then missing opportunities. The family-businesses often avoid external debt and
strong dependence on the credit institutions. It is found in the study by Anderson et al. (2003),
Villalonga and Amit (2006). The statistics of Nicolas Kachaner et.al (2012) showed that the debt
proportion of the family businesses accounted for about 37% of total capital, lower than the
5


number 47% of the non-family in period 2001-2009. It also pointed out that the family business
is cautious in using of capital during good or bad period. In fact, expenditures and investments
are controlled and saved properly. The study also showed that the majority of family businesses
do not fancy for receiving large projects that are not related to their core competencies. They
seem to like to expand the business in a sustainable and systematical manner rather than bet on
risky investments. The risky investment aversion of the family firm was also found in the
researches of Gersicket et al (1997); Cabrera-Suárez et al (2001); Zahra (2005) and Morck et al.
(2006). Le Breton- Miller et al (2006) indicated that the family firms favor the investment
decision for long-term. Gomez- Mejia et al., (2003) stated that the family firms are less
innovative than the non-family ones.
On the contrary, there is reason to speculate that family businesses are more laborintensive than the non-family ones. The family firm has many advantages to use more intensive
and effective labor than non-family one. In fact, the majority of family businesses are better in
investing, developing and training the workforce than non-family ones. Nicolas Kachaner et al.
(2012) points out that family businesses spend an average of 885€ a year per employee, more
than 336 € of non-family firms. In addition, workers in family businesses tend to undergo
training process that can accumulate the knowledge, experience and skills necessary to capture
the entire production process, and they can flexibly switch their work in other positions and

different roles within a firm (Becker 1974; Fiengener et al 1996). Moreover, in the studies of
Tagiuri & Dais (1996) and Ward (1988) argue that the good working environment and culture in
the family also contribute to increasing the efficiency of employees in enterprises. However,
wages paid to workers in family businesses are often lower than other labor-intensive enterprises
(Levering and Moskowitz 1993).
All these considerations suggest that there are the differences in using resources- labor
and capital- between family and non-family firm that will influence their performance. The next
section presents the differences of the performance between two types of firms.

6


2.3. The performance of family and non-family firms
According to Nicolas Kachaner et.al (2012), the family businesses perform better in the
long term than other types. In fact, the family firms aim to the stability and not too concentrated
in short term performance. Due to risk aversion, they can ignore an opportunity of expanding the
business or investment during the good economic growth periods, so their performance during
these periods may be worse. However, while the economy is in crisis or in weakness gives them
brighter results. The difference of their operation, the goal and their resources uses, comparing to
other types of other businesses, leads them to the different results in short and long term. So the
figure 2.1 gives us insight about the performance of family and non-family Firms. See the
business results of the family businesses are relatively stable over time. The average return on
equity of the family business kept stably at 13% to 14% over the year. In contrast, a different
situation occurs for the non-family business firm that average return of non-family ones vibrated
dramatically corresponding to the fluctuations of the GDP growth rate of the world economy. In
addition to this, the differences of their performance in specific countries were also considered
by many researches.
Figure 2.1: The long-term view of family-business performance

Source: Havard Business Review 2012

Bosworth and Loundes (2002) used the data of 4354 small and medium enterprises from
Australia in order to analyze the discretionary investment, innovation, productivity and
7


profitability. It found that the businesses have the inferior performance in productivity and
profitability comparing to the non-family ones. The family firms are like invest more in tangible
assets but not significantly different in R&D, intangible assets and increased training. It also
indicated that there are no significant difference in the innovation between family and non-family
firm.
According to Barth et.al (2005), the management regime is the significant factor for less
productivity of the family firms comparing to the non family firms. This productive gap is about
10%. The productivity of the family firm hiring the manager from outside the owner family is
not different to the non-family firm. The gap productivity is estimated about 14 % and increase
to 15-16% while analyzing only in the sub-sample of family firm. This study uses the data of 438
firms in the firm-level survey associated with the Norwegian Business and Industry.
CIEM (2009) analyzes 2520 small and medium enterprises of Vietnam to find out the
determinants of labor productivity. It indicates that the labor productivity increases with the firm
size. The firms in Ho Chi Minh are more productive than in other provinces. The household or
family firms are less productive significantly comparing to the private firm. The new technology
used is found to be significant to increase the labor productivity but the relation becomes
insignificantly while estimating in the panel-data framework.
Martikainen et al. (2009) using the S&P 500 firm data containing 159 manufacturing
firms found that the productivity of the family firms are higher than of the non-family firms. In
addition to this, there are no differences in production technologies between two kinds of firm.
The research suggests that the higher efficiency of family firms makes the difference in the total
output. Due to the more efficiency in using input resources, the family firms have the better
performance than the non family firms.
F. Barbera, K. Moores (2011) utilized the data of more than 4500 businesses that are the
Australian small and medium-sized enterprise for the year 1995-1995 in order to find out the

difference between family and non-family firm on the total factor productivity (TFP) and
contribution of inputs to total output. Basing on the Cobb-Douglas and assuming that elasticity
8


of two inputs, labor and capital, to the total output are divergent between family and non-family
firm, the study indicated that the contribution of labor input in the family firm is higher
significantly than in the non-family firm. In contrast, the contribution of capital to the total
output in the family firms is significant lower for comparable family firms. While allowing for
the heterogeneous contribution of inputs to output, there are no difference in the TFP between
family and non family firm.
Galve-Górriz, C. & Salas-Fumás, V. (2011) studied the difference of behavior and
performance between family and non-family firms of non regulated firms in the Spanish stock
market for the period 1990-2002/2004. It found that comparing to the non-family firms the
family ones are smaller in size and have the lower average growth rate of total assets. Moreover,
the family firms are less capital-intensive and higher total factor productivity than their
counterparts. It also indicated that there are no differences in average profitability and financial
policies between two types of firm. The author encouraged using the productive efficiency to
investigate the effect of ownership to the firms’ performance.
Table 2.1: Summary of Empirical Review on the performance difference between family
firms and their counterparts
Author

Variable and

Bosworth

Panel

and

effects

Loundes

productivity a

(2002)

panel probit f

innovation an
investment.
Dependent
productivity

value added),
(proxy
value
variables for


discretionary
Independent
and

characteristic

and of the ind
Assuming

elasticities

for both fam
family firm.
Barth et.al

-Cobb-Dougl

(2005)

function,

model to esti
of the
productivity
Dependent
added
Independent

dummy varia
owned
regime,

firm, industry

-Probit-mode

2SLS to anal

of family ver

manager.
-Assuming
elasticities

for both fam
family firm.

10


CIEM

-OLS and bal

(2009)

Dependent
revenue

employee (re
employees)
added
employee.
Independent
number

variables for

technology u
sector.

Martikainen

Cobb-Dougla

et al. (2009)

function,
estimate.
Dependent
annual sale
Independent

number of em
annual
equipment;
binary

involvement.

The elasticit

output is teste
between


family firm and found to be
equal.

F.

K.
(2011)

Barbera, Cobb-Douglas
Moores function,
panel
effects.
Dependent
value added
Independent
capital

for family involv
Assuming that
elasticity
between family
family firm.
Galve-

Cobb-

Górriz, C.

function, OLS

& Salas-

Dependent

Fumás, V.

added per labor

(2011)

Independent
capital
dummy
involvement
Assuming

of the input facto

between two typ

12


After review some concerning studies, it suggests us some following hypothesis:


H1: Ceteris paribus, the contribution to output of labor factor in family

firms is higher than in non-family firms.


H2: Ceteris paribus, the contribution to output of capital factor in family

firms is lower than in non-family firms.


H3: Ceteris paribus, there are no difference in the total factor productivity

between in the family and non-family firms
Although there are differences in the performance between two types of business in
particular countries, the role of the family businesses is significant in the economy especially in
the developing countries. The next section will highlight the importance of the family firm.
2.4. The importance of the family firm
The family business plays a very important role in the economy and society especially in
the developing coutries. On reviewing previous researches on family business, European studies
Family Businesses (EFP), (2012) pointed out a number of significant contributions of family
businesses as following. They have a better performance in the long term, more contribution to
the community, more stability due to low debt and risk aversion, and the ability to create more
jobs. Some following impressive numbers are also given in this paper. In most countries around
the world, the family firms contribute about 60-90% of non-state GDP, create 50-80% of
employees in private sector, and have the proportion about 70% to 90% in total firms in the
world. In the Family Business Survey (2012) of PwC named “Family Firm: A resilient model for
the 21st century” has indicated the significance of the family business in the world economy and
the indispensable role in boosting economic growth and recovery. It has also pointed that if they
are received more supports from the government’s policies, their performance should change
even more.
According to Michael, P. Todaro and Stephen, C. Smith (2012), family businesses in
developing country present the informal sector which use simple and labor-intensive technology.
The labor is less access to education, skills training, good living and working environment and
the financial capital. The productivity of enterprises in this sector is relatively lower than in the
formal sector. However, the informal sector plays an important role in the economy of
13


developing countries, generating more than half of the employment for the population in urban

areas.
In addition, Michael, P. Todaro and Stephen, C. Smith (2012) also indicate some
contributions of the informal sector for economic development in the developing countries. First,
despite receiving little preference policy than the formal sector, it also generates a surplus that
promotes the development of urban economy. Secondly, the informal sector is not intensive
capital, in accordance with the capital shortage of developing countries. In addition, it
contributes to the formation of human resources by education and skill training with a lower cost
than other sectors. Moreover, the informal sector uses resources more efficiently and its ability to
apply technology better. Finally, because the majority of the poor are in the informal sector,
promoting the economic development of this sector helps to distribute the benefits to the poor.
2.5. Other determinants of a typical firm’s performance
In addition to the family involvement, there are also some factors that impact to the firm’s
performance. The most significance is the location. Raspe, O; Oort, F.G.van (2011) indicated that
the knowledge externalities and the proximity influenced to the decision of firm on their location
choice and had impact to their performance. More specifically, the urban location, where there is
the intensity of universities and R&D firms, had the significant impact on the new firms’
performance with the different levels based on the features and contexts of firms. Andersson,
Martin & Lööf, Hans(2011) found that the labor productivity of firms is impacted by the size and
agglomeration of their location while controlling for several factors, then supported the positive
learning effect. C. Mellander, R. Florida (2012) stated the geographic distribution of human
capital. The intensity of universities, the service diversity and tolerance are the important factors
affect geographic distribution of human capital. M. Sahin et al (2010) presented that the urban
location which has the multicultural entrepreneurial environment has the positive effect to firm
performance.
The second is export that has the impact on the firm performance. This issue was first introduced
by Krugman (1980) that exporting help firms receive gains and returns from trade, make firms
get more competitive advantages and it was explained by the concept called “ learning by
exporting”. Following to the work of Krugman, Bernard and Jensen (1995) found 14

that the export firms are more productive than non-export firms. The significant impact of
exporting to the firm performance was also indicated in many studies such as Baldwin & Gu
(2003), Blalock & Gerler (2004), Yasar & Rejesus (2005). Recently, Yong Yang (2008) has
argued that exporting effects significantly to the performance and the effect was found more in
the sample of small and medium firms than in large ones.
Moreover, several researches have indicated that the demographics characteristics of the
management or director board have the relationship to the firm performance. For example,
Bilimoria and Piderit (1994a) pointed out that the ages of the directors; Bond, Glouharova &
Harrigan (2010) and Singh (2007) found the educational level of the director board. In addition
to this, the gender of the director or the gender ratio of the board also has the impact on the firm
outcome (Adams & Ferreria, 2009; Westphal & Stern, 2007; Nielsen & Huse, 2010).
2.6. Conceptual framework
After reviewing previous researches, I suggest the conceptual framework as the figure 2.2
below. In this paper analyzes the impact of "family involvement" to two inputs that are labor and
capital and to the total output. In addition to labor and capital impacting to output, other factors
are also considered such as location, export, level of using machine, age, gender, etc... So there
can be seen the difference in the contribution of labor and capital to total output and in the
productivity between family businesses and non-family businesses. Based on this conceptual
framework, the next sections will present the econometric estimate results.
Figure 2.2: Empirical framework
Capital

Labor

Family

TOTAL
OUPUT

Involvement

Other
determinants
Location,
Export, age, 15 gender, etc…


CHAPTER III
RESEARCH METHODOLOGY
This chapter indicates the development and the recent performance of small and medium
enterprises in Vietnam. Then it presents the sources of data used for the analysis of SMEs in
Vietnam. Based on previous studies and this data sources, the next presents the research
methodology and variable treatment used in the econometric estimation.
3.1. The development of Domestic Private Sector and Small and Medium Enterprises in
Vietnam
Since the implementation of Doi Moi 1986, Vietnam has moved from centralized
economy to market economy. Due to the impact of the new regime, there has been a structural
shift quite markedly in the types of companies. The most notable is the dramatic reduction of the
state sector and the significant increase of the non-governmental sector. It can be seen by looking
at Table 3.1 that shows the proportion of state sector clearly decreased about 8.5 times from
13.62 % to over 1.60 %. Conversely, the non-governmental companies increased significantly
and continuously from about 82% in 2000 to reach more than 95% in 2008. In addition, the
business of foreign investment sector is in the range of 3% over the year.
Table 3.1: Number and ownership structure of Vietnamese enterprises 2000-2008
Year
Total
Ownership Structure
-State enterprise (%)
-Non-state enterprise (%)
-Foreign investment
enterprise (%)

Source: GSO 2010


The reason for the development of the non-governmental firms is the introduction of the
Enterprise Law in 2000 that has created advantage conditions for the non-state sector developing
strongly. According to Vo Tri Thanh and Nguyen Tu Anh (2006), the Enterprise Law has created
a better business and investment environment for the business and a more transparent legal
mechanism to ensure good relations between businesses and government. The private sector
contains mostly small and medium enterprises, seeing table 3.2 and table 3.3. Hence the strong
growth of this sector has the significant contribution of small and medium enterprises.
Through the year 2000 to 2008 the number of SMEs increased about five times, and its
ratio reached to more than 97% in non-state enterprise and about 95% in total enterprises. The
last three lines in table 3.2 give the ratio of SMEs in each type of business ownership. The share
of the state sector sees the reduction and at about 50% in all businesses. The group of foreign
investment SMEs is accounted for about 75% of the total. Moreover, there are the significant
changes in the structure of SMEs through years. Table 3.3 provides the data on the proportion of
different types of ownership in the small and medium business sector. Similar to general trends
of enterprises are now the apparent decline of the state sector and the astonishing rise of nonstate sector. In proportion, the state sector fell more than 10 times and the non-state sector
increased rapidly over 1.1 times. The businesses of foreign investment sector remain slightly at
around 2.5%
Table 3.2: Vietnamese SMEs’ share in different ownership types
By capital size
Year
Total
Ownership Structure
-State enterprise (%)
-Non-state enterprise (%)
-Foreign investment
enterprise (%)

17


By employee size
Year
Total
Ownership Structure
-State enterprise
-Non-state enterprise
-Foreign investment
enterprise
Source: GSO 2010
Table 3.3: The number and ownership structure of Vietnamese Small and Medium
Enterprises period 2000-2008
By capital size
Year
Total
Ownership Structure
-State enterprise
-Non-state enterprise
-Foreign investment
enterprise
By employee size
Year
Total
Ownership Structure
-State enterprise
-Non-state enterprise
-Foreign investment
enterprise

Source: GSO 2010
See appendix 1 to understand how Vietnam government classifies the micro, small, medium and
large enterprises based on the “Criteria for a small and medium enterprise, according to the
Decree No. 56/2009/ND-CP dated 30 June 2009 of the Government”
18