financial management practices and financial characteristics

A THESIS SUBMITTED TO THE GRADUATE COLLEGE OF MANAGEMENT IN PARTIAL
FULFILLMENT OF REQUIREMENTS FOR THE DEGREE OF
DOCTOR OF BUSINESS ADMINISTRATION
AT SOUTHERN CROSS UNIVERSITY, N.S.W., AUSTRALIA
Certificate








I certify that the substance of this thesis has not already been submitted for any degree
and is not currently being submitted for any other degree or qualification.

I also certify that, to the best of my knowledge, any help received in preparing this thesis,
and all sources used have been acknowledged in this thesis.

Signature: Kieu Minh Nguyen ______________________

Date: ___________________________________________

ii
Acknowledgements



I owe a debt of gratitude to many people who helped me complete this thesis. I would
like to acknowledge the help of all. First of all I would like to express my deepest
acknowledgement to my supervisor, Professor Geoffrey Grant Meredith from the
Graduate College of Management (SCU), for his valuable advice and recommendations.
I acknowledge Dr. Lyndon Brooks, his assistants from the Graduate Research
College (SCU), and Mr. Tho Dinh Nguyen from the School of Marketing (UTS) for their
support with statistical techniques and data analysis. I also acknowledge Ms. Rosemary
Graham from the International Office (SCU) for her comments on English in earlier
drafts of my thesis.
In the process of data collection for this research, many people contributed to the
task and I am particularly grateful for their contributions. I am greatly indebted to Dr.
Pham Van Nang, Dr. Le Bao Lam, and Dr. Le Thanh Ha from Ho Chi Minh City
University of Economics for their introduction to contacts with the small and medium
enterprises (SMEs) community located in Ho Chi Minh City.
I also wish to thank Mr. Nguyen Trong Hanh, Vice Director of Department of
Taxation, Mr. Du Quang Nam, Vice Director of Statistical Office – Ho Chi Minh City;
and Mr. Tran To Tu, Managing Director of Investment Consulting Corporation for
providing secondary data related to the current practices of SMEs in Vietnam.
I would like to thank the following organizations which supported me in
completing my thesis and degree: the Swiss Agency for Development and Cooperation
(SDC), the Swiss – AIT – Vietnam Management Development Program (SAV), the
Mekong Project Development Facility (MPDF), the Small and Medium Enterprise
Promotion Centre (Vietnam Chamber of Commerce and Industry – VCCI), HCM City

University of Economics, HCM City Statistical Office, HCM City Department of
Investment and Planning, HCM City Department of Taxation. Specially, I would like to
extend my sincere gratitude to the Government of Switzerland and Dr. Hans Stoessel,
Director of SAV for granting the scholarship which enabled me to participate in a
doctoral degree at Southern Cross University, New South Wales, Australia.

iii
I would particularly like to thank the following friends for their support related to
data collection: Mr. Doan Thanh Tuan, Ms. To Ngoc Huong, and Mr. Bui Hai Binh from
Truong Doan Company Limited, Mr. Hoang Trong from Ho Chi Minh City University of
Economics, Mr. Vo Sy Nhan from Ho Chi Minh City Department of Investment and
Planning, and all my students who worked as fieldworkers for data collection.
Finally, to my parents and my wife, I wish to extend my loving thanks for their
encouragement. My greatest debt of gratitude is to my wife, Mrs. Que Thi Tran, who was
patiently waiting me during my study in Australia. This thesis could not have been
written without her daily encouragement.

iv
Abstract


After a decade of reforming policy, building and developing the multi-sector market
economy, Small and Medium Enterprises (SMEs) in Vietnam have developed strongly
and contributed to creating employment, increasing GDP, and raising the nation’s volume
of exports. However, SMEs have found difficulties on the way to development due to

lack of management experience and financial resources, and due to uncertainty within the
business environment. As a result, SMEs often faced obstacles during their operations.
This thesis examines the relationship between financial management and profitability of
SMEs to determine whether financial management practices and financial characteristics
impact on SME profitability.
Objectives of the thesis are (1) to investigate and describe features of financial
management practices and financial characteristics of SMEs in Vietnam, (2) to develop
and test a model of SME profitability, and (3) to contribute knowledge of the
relationships between financial management and characteristics to improve SME
profitability by using tools of efficient financial management.
In terms of structure, the thesis has six chapters. The thesis begins by defining the
research problem and questions, and providing a justification for the research study.
Chapter one also reviews the research background, and presents definitions of terms,
significance and scope of the study. Chapter two examines the economic background,
business structure and the development of SMEs in Vietnam. This chapter also reviews
previous research related to financial management for SMEs in Vietnam to identify gaps
between financial management for SMEs in Vietnam and financial management for
SMEs worldwide.

Chapter three reviews financial management including financial management
practices, financial characteristics and profitability of SMEs around the world, especially
in the developed economies such as the United States of America (USA), the United
Kingdom (UK), Australia and Canada. This review emphasizes profitability and the
impact of financial management practices and financial characteristics on SME
profitability. Objectives of this chapter are to review previous research related to the
areas of financial management practices, financial characteristics, and profitability of

v
SMEs and to build a model of the impact of financial management practices and financial
characteristics on SME profitability.

Chapter four discusses aspects of the research methodology including research
design, data collection and data analysis methods, and hypothesis testing to support the
model. Objectives of this chapter are: (1) to justify the research methodology of this
study, (2) to explain research methodology used in the study, and (3) to demonstrate how
research design, and data collection and analysis can be utilized in this study to answer
the research questions outlined in the chapter 1.
Data analysis and findings are presented in chapter five. This chapter presents
descriptive findings of financial management practices, financial characteristics and SME
profitability and findings of the research study related to testing the model of SME
profitability. Objectives of this chapter are (1) to systematically present the descriptive
findings of the research study, (2) to interpret significance of these findings based on data
analysis, (3) to present the results of testing the model of SME profitability, and (4) to
explain how the model, developed from a literature review, was supported by data
analysis. Finally, the thesis ends with chapter six where conclusions are summarized and
applications of the research findings are indicated for the financial management
practitioners.
The thesis provides descriptive findings of financial management practices and
financial characteristics and demonstrates the simultaneous impact of financial
management practices and financial characteristics on SME profitability. In addition, the
research study provides a model of SME profitability, in which profitability was found to
be related to financial management practices and financial characteristics. With the
exception of debt ratios, all other variables including current ratio, total asset turnover,
working capital management and short-term planning practices, fixed asset management
and long-term planning practices, and financial and accounting information systems were
found to be significantly related to SME profitability.
With the findings as presented above, this research study provides many
implications for financial management practices and contributes to knowledge of
financial management of SMEs. The model of SME profitability can be used as guidance
for actions to improve the profitability of SMEs in Vietnam.

vi
Glossary of terms and abbreviations


AFTA ASEAN Free Trade Agreement
ANOVA Analysis of variance
APEC Asia Pacific Economic Cooperation
ASEAN Association of South East Asian Nations
CED Committee of Economic Development
CF Cash flows
CUR Current ratio
DER Debt ratio
E.q Equation
EBT Earning before tax
EBIT Earning before interest and taxes
EFF Efficiency of financial management practices
EOQ Economic order quantity
FAIS Financial and accounting information system
FALP Fixed asset management and long-term planning practices
FDI Foreign direct investment
FSSB Financial Studies of the Small Business
GDP Gross domestic products
GSO General Statistical Office
IFC International Financial Corporation
IRR Internal rate of return
MIRR Modified internal rate of return
MPDF Mekong Project Development Facilities
NOI Net-operating-income
NPV Net present value
PRO Profitability

RE Retained earnings
ROA Return on assets

vii
ROE Return on equity
ROI Return on investment
ROS Return on sales
SBA The Small Business Administration (United State of America)
SBV The State Bank of Vietnam
SME Small and medium enterprise
SMENET Small and Medium Enterprise Net
SPSS The Statistical Package for Social Science
TA Total assets
TAT Total asset turnover
UK United Kingdom
USA United States of America
USM Unlisted Securities Market
VCCI Vietnamese Chamber of Commerce and Industry
VIDB Vietnam Investment and Development Bank
VN Vietnam
VND Vietnam dong
Vietcombank Vietnam Bank for Foreign Trade
WTO World Trade Organization
WCSP Working capital management and short-term planning practices

viii
Table of Contents


CERTIFICATE
.......................................................................................................................................... ii
ACKNOWLEDGEMENTS
....................................................................................................................... iii
ABSTRACT
.............................................................................................................................................. v
GLOSSARY OF TERMS AND ABBREVIATIONS
................................................................................ vii
TABLE OF CONTENTS
.......................................................................................................................... ix
LIST OF TABLES
..................................................................................................................................... xiii
LIST OF FIGURES
.................................................................................................................................. xvii

CHAPTER ONE: INTRODUCTION TO THE STUDY

1.1 INTRODUCTION ...................................................................................................................1
1.2 RESEARCH BACKGROUND.................................................................................................3
1.3 RESEARCH PROBLEM .........................................................................................................4
1.3.1 Research questions...................................................................................................6

1.3.2 Research objectives ..................................................................................................6
1.4 METHODOLOGY....................................................................................................................7
1.5 JUSTIFICATION FOR THE STUDY.......................................................................................8
1.6 DEFINITIONS OF TERMS USED IN THE STUDY ................................................................10
1.7 SIGNIFICANCE AND SCOPE OF THE STUDY ....................................................................13
1.8 ANALYTICAL MODEL FOR THE STUDY..............................................................................13
1.9 STRUCTURE OF THE STUDY ..............................................................................................15
1.10 CONCLUSIONS .......................................................................................................................16

CHAPTER TWO: THE ECONOMIC STRUCTURE AND SMEs IN VIETNAM

2.1 INTRODUCTION ....................................................................................................................17
2.2 VIETNAM: BACKGROUND INFORMATION..........................................................................19
2.2.1 Overview of the country.............................................................................................19
2.2.2 The Vietnam economy...............................................................................................23
2.2.3 The Vietnam population and labour...........................................................................38
2.3 VIETNAM BUSINESS STRUCTURE .....................................................................................40
2.3.1 Types of business in Vietnam....................................................................................41
2.3.2 Overview of enterprises in Vietnam...........................................................................43
2.3.3 Small and medium enterprises in Vietnam................................................................44
2.3.4 Policies for supporting SMEs.....................................................................................50

ix
2.4 SMALL AND MEDIUM ENTERPRISE FINANCE IN VIETNAM.............................................51
2.4.1 Types of finance.........................................................................................................52
2.4.2 Use of finance............................................................................................................53
2.4.3 Financial management for SMEs...............................................................................54
2.4.4 Problems in financial management............................................................................55
2.5 BUSINESS STRUCTURE AND SMEs IN HO CHI MINH CITY .............................................56
2.6 CONCLUSIONS......................................................................................................................58

CHAPTER THREE: FINANCIAL MANAGEMENT AND PROFITABILITY OF
SMEs

3.1 INTRODUCTION ....................................................................................................................59
3.2 DEFINITIONS OF SMEs.........................................................................................................61
3.2.1 Qualitative definitions.................................................................................................61
3.2.2 Quantitative definitions ..............................................................................................64
3.2.3 The forms of ownership of SMEs...............................................................................65
3.3 FINANCIAL MANAGEMENT FOR SMEs...............................................................................67
3.3.1 Defining financial management .................................................................................68
3.3.2 Objectives of financial management..........................................................................69
3.3.3 Major decisions of financial management .................................................................71
3.3.4 The specific areas of financial management .............................................................72
3.4 FINANCIAL MANAGEMENT PRACTICES.............................................................................76
3.4.1 The context of financial management practices ........................................................76
3.4.2 Accounting information systems................................................................................77
3.4.3 Financial reporting and analysis ................................................................................83
3.4.4 Working capital management ....................................................................................89
3.4.5 Fixed asset management ..........................................................................................95
3.4.6 Capital structure management...................................................................................100
3.5 FINANCIAL CHARACTERISTICS OF SMEs .........................................................................104
3.5.1 Identifying financial characteristics............................................................................104
3.5.2 Measuring financial characteristics............................................................................107
3.5.3 Previous findings related to financial characteristics.................................................111
3.6 SME PROFITABILITY.............................................................................................................119
3.6.1 Importance of profitability...........................................................................................119
3.6.2 Defining and measuring profitability...........................................................................120
3.6.3 Factors influencing profitability ..................................................................................123
3.7 RELATIONSHIPS BETWEEN FINANCIAL MANAGEMENT AND SME PROFITABILITY....126

3.8 MODEL OF THE IMPACT OF FINANCIAL MANAGEMENT ON SME PROFITABBILITY....128

x
3.9 CONCLUSIONS......................................................................................................................131

CHAPTER FOUR: RESEARCH METHODOLOGY

4.1 INTRODUCTION ....................................................................................................................132
4.2 APPRAISAL OF PRIOR RESEARCH METHODOLOGIES ...................................................134
4.3 RESEARCH DESIGN .............................................................................................................137
4.3.1 Classification of research design...............................................................................137
4.3.2 Selecting research design or paradigm.....................................................................140
4.3.3 Selecting research methods or techniques ...............................................................141
4.4 VARIABLE DEFINITIONS, SURVEY INSTRUMENT AND MODEL DEVELOPMENT..........144
4.4.1 Variable measurements and survey instrument........................................................144
4.4.2 Model development....................................................................................................162
4.4.3 Hypothesis statements ..............................................................................................165
4.5 DATA COLLECTION METHODS ...........................................................................................168
4.5.1 Secondary data collection..........................................................................................169
4.5.2 Primary data collection ..............................................................................................170
4.6 DATA TRANSFORMATION ..................................................................................................174
4.7 DATA ANALYSIS METHODS.................................................................................................175
4.7.1 General consideration................................................................................................175
4.7.2 Descriptive statistics ..................................................................................................176
4.7.3 Bivariate analysis.......................................................................................................177
4.7.4 Multivariate analysis...................................................................................................178
4.8 CONCLUSIONS......................................................................................................................183

CHAPTER FIVE: DATA ANALYSIS AND FINDINGS

5.1 INTRODUCTION ....................................................................................................................184
5.2 LINKS BETWEEN DATA ANALYSIS AND RESEARCH OBJECTIVES AND QUESTIONS.186
5.3 DESCRIPTIVE FINDINGS OF THE RESEARCH STUDY.....................................................187
5.3.1 Sample descriptions and SME characteristics ..........................................................187
5.3.2 Descriptive findings of financial management practices............................................190
5.3.3 Descriptive findings of financial characteristics .........................................................206
5.3.4 Descriptive findings of profitability of SMEs...............................................................211
5.4 ASSOCIATIVE ANALYSIS AND FINDINGS OF THE RESEARCH STUDY..........................215
5.4.1 Factor analysis and principal components of financial management practices ........216
5.4.2 Bivariate analysis and findings ..................................................................................221
5.4.3 Multiple regression analysis and findings..................................................................225

xi
5.4.4 Test for the difference of average profits between efficient and inefficient financial
management groups of SMEs....................................................................................234
5.5 CONCLUSIONS......................................................................................................................236

CHAPTER SIX: CONCLUSIONS AND IMPLICATIONS

6.1 INTRODUCTION...................................................................................................................237
6.2 CONCLUSIONS RELATED TO RESEARCH QUESTIONS AND TESTING THE MODEL..239
6.2.1 Conclusions related to financial management practices ...........................................239
6.2.2 Conclusions related to financial characteristics.........................................................247
6.2.3 Conclusions of SME profitability................................................................................249
6.2.4 Summary of research question answers ...................................................................255
6.3 IMPLICATIONS OF THE RESEARCH STUDY.....................................................................258
6.3.1 Implications for financial management practices of SMEs........................................258
6.3.2 Contributions to knowledge of this research into financial management for SMEs ..262
6.4 LIMITATIONS OF THE RESEARCH STUDY .......................................................................263
6.5 IMPLICATIONS FOR THE FURTHER RESEARCH.............................................................264

Bibliography......................................................................................................................................266
Appendix 1
Appendix 2
Appendix 3
Appendix 4
















xii
List of tables
Table Page
2.1 Changes in economic structure, 1986 – 1991............................................................27
2.2 State-budget revenue, 1986 – 89................................................................................28
2.3 State-budget revenue, 1991 – 93................................................................................29
2.4 Financial institutions in Vietnam, 1995.....................................................................30
2.5 GDP index by economic sector and rate of inflation.................................................31

2.6 Index of exchange rate of USD/VND........................................................................32
2.7 GDP index by economic industry..............................................................................32
2.8 Agriculture development over the years....................................................................33
2.9 Industry development over the years.........................................................................34
2.10 Export and import value by major countries..............................................................35
2.11 Population by sex and areas.......................................................................................38
2.12 Population growth rates and structure........................................................................39
2.13 Labor force by economic sector.................................................................................39
2.14 Labor force by the state and non-state sector.............................................................40
2.15 Unemployment rate of labour force in 1998..............................................................40
2.16 Number of businesses by economic sector and average capital................................43
2.17 Number of businesses and employees on July 1, 1995..............................................44
2.18 Definitions of SMEs in Asian countries ....................................................................46
2.19 Number of enterprises in manufacturing industry by scale of employees and total
capital.........................................................................................................................49
2.20 Business operation problems of SMEs in Vietnam ...................................................50
2.21 The kind of SME support programs...........................................................................51
2.22 Some financial characteristics of SMEs in Vietnam..................................................54
2.23 Business structure of SMEs in Ho Chi Minh City.....................................................57
2.24 Size of businesses in Ho Chi Minh City....................................................................57
3.1 Summary of the quantitative definitions of small business.......................................65
3.2 Forms of SME ownership in the USA.......................................................................65
3.3 Legal status of small firms in the UK........................................................................66

xiii
3.4 Summary of advantages and disadvantages of each form of ownership ...................67
3.5 Responsibility for the bookkeeping and accounting task ..........................................78
3.6 Responsibility for preparation and use of financial information...............................78
3.7 The results of survey of computer software application............................................79
3.8 The most important applications of computer software ............................................79

3.9 The most important applications of computers..........................................................80
3.10 Percentage of awareness and utilization of costing systems......................................81
3.11 Evaluate the adequacy of accounting records............................................................82
3.12 Accounting information prepared externally or internally ........................................82
3.13 Summary of research areas related to the accounting system practices of SMEs .....83
3.14 Use of financial statement techniques by small manufacturers in Quebec................84
3.15 Responsibility for financial statement interpretation.................................................85
3.16 Proportion of respondents indicating use of selected financial ratios........................86
3.17 Percentage of use of financial ratios..........................................................................87
3.18 Percentage of preparing accounting information both internally and externally.......88
3.19 Summary of the main research areas related to the financial reporting and analysis89
3.20 Cash surplus investment practices.............................................................................90
3.21 Instruments of short-term investment used................................................................91
3.22 Awareness and utilization of credit control systems..................................................92
3.23 Methods used by small and large enterprises to determine inventory level..............92
3.24 Working capital management: Frequency (%) of using or reviewing.......................93
3.25 Summary of working capital management practices.................................................95
3.26 Percentage of firms using capital project selection methods.....................................96
3.27 The extent of use of formal methods of the capital investment evaluation ...............96
3.28 Primary method of investment analysis.....................................................................97
3.29 Percentage use of different methods by small, medium, and large enterprises.........97
3.30 Percentage of kinds of screening rate used to evaluate the capital projects ..............98
3.31 Methods of determining the required rate of return as using discounted cash flow..99
3.32 Summary of fixed asset management practices.........................................................99
3.33 Viewpoint guiding firms’ financing decisions...........................................................102
3.34 Factors influencing percentage of bank debt usage...................................................103

xiv
3.35 Summary of literature review of financial characteristic variables ...........................106
3.36 Summary of measurement of financial characteristic variables ................................110

3.37 Financial ratios used in the study of Meric and Meric (1997)...................................117
3.38 Comparison of liquid ratios between Korean and USA firms...................................118
3.39 Summary of measurement of SME profitability........................................................123
4.1 Classification of research designs..............................................................................139
4.2 Summary of advantages and disadvantages of the most typical surveys...................143
4.3 Model classification...................................................................................................163
4.4 Number and percentage of SME sample and population...........................................174
4.5 Summary of multivariate techniques for the analysis of dependence........................181
5.1 Structure of SMEs in the sample by type of industry and form of ownership...........187
5.2 Sample distribution by form of ownership within industry.......................................189
5.3 Business characteristics of SMEs in the sample........................................................189
5.4 Characteristics of accounting system organization....................................................190
5.5 Responsibility – accounting information system.......................................................191
5.6 Using computer in accounting information system...................................................192
5.7 Kinds of financial statements prepared......................................................................193
5.8 Frequency of preparing and analyzing financial statements......................................193
5.9 Responsibility – preparing and analyzing financial statements.................................194
5.10 Kinds of financial analysis and ratios used................................................................194
5.11 Preparing cash budgets ..............................................................................................196
5.12 Cash balance determination.......................................................................................196
5.13 Cash surplus or shortage............................................................................................197
5.14 Sales on credit and credit polices...............................................................................198
5.15 Frequency of reviewing receivable levels and bad debts...........................................199
5.16 Percentage of bad debts compared to sales................................................................199
5.17 Frequency of reviewing inventory levels and preparing inventory budgets..............200
5.18 Basis of determining inventory levels and using EOQ Model ..................................201
5.19 Frequency of evaluating investment projects and reviewing efficiency of using
fixed assets after investing.........................................................................................202
5.20 Methods used to evaluate investment projects...........................................................203

xv
5.21 Frequency of preparing and reviewing financial budgets..........................................204
5.22 Kinds of financial budgets prepared ..........................................................................204
5.23 Responsibility – preparing financial budgets.............................................................205
5.24 Frequency of comparing between budgeted and actual results .................................205
5.25 Descriptive statistics of financial ratios.....................................................................207
5.26 Test for difference of means of financial ratios between two groups........................208
5.27 Comparison of current ratios .....................................................................................208
5.28 Descriptive findings of SME current ratios ...............................................................209
5.29 Descriptive findings of SME debt ratios....................................................................210
5.30 Descriptive findings of SME activity ratio................................................................211
5.31 Overview of SME profitability..................................................................................213
5.32 Relationship between profitability and types of business..........................................213
5.33 Relationship between profitability and business characteristics................................214
5.34 Total variance explained and three principal components of financial management
practices .....................................................................................................................217
5.35 Factor analysis results for measuring financial management practices.....................219
5.36 Three principal components of financial management practices...............................218
5.37 Correlation matrix of PRO, ROS, ROA, and ROE....................................................222
5.38 Correlation matrix of PRO and independent variables..............................................223
5.39 Correlation matrix of ROS and the independent variables........................................224
5.40 SME profitability regression model using profitability as dependent variable .........226
5.41 Descriptive finding of relationship between profitability and current ratio ..............227
5.42 Relationship between SME profitability and the efficiency of financial
management practices................................................................................................230
5.43 Regression model of SME profitability after removing debt ratio ............................231
5.44 SME profitability regression model using return on sales as dependent variable.....232
5.45 Descriptive statistics of profitability of two groups of SMEs....................................235
5.46 Independent group test of mean profit difference......................................................235
6.1

Summary of conclusions related to financial management practices........................246
6.2
Summary of conclusions related to financial characteristics of SMES.....................249
6.3
Summary of research questions and answers.............................................................257

xvi
List of figures

Figure Page
1.1 Structure of chapter 1.................................................................................................2
1.2 Fields of the research problem...................................................................................5
1.3 Analytical model for the research..............................................................................14
1.4 Structure of the study.................................................................................................15
2.1 Structure of chapter 2.................................................................................................18
2.2 Political structure of Vietnam....................................................................................23
2.3 Business structure in Vietnam ...................................................................................41
2.4 Breakdown of business by size..................................................................................42
2.5 SME financial management practices and the gap....................................................56
3.1 Structure of chapter 3.................................................................................................60
3.2 The central position and role of financial management.............................................68
3.3 The relations among objectives of financial management.........................................70
3.4 A model of financial management.............................................................................74
3.5 Interaction between theories and practices of financial management .......................75
3.6 Financial ratios linked to return on equity.................................................................125
3.7 Model of the impact of financial management on SME profitability........................130
4.1 Structure of chapter 4.................................................................................................133
4.2 Survey instrument for measuring accounting information system............................148
4.3 Survey instrument for measuring financial reporting and analysis ...........................150
4.4 Survey instrument for measuring cash management practices..................................152

4.5 Survey instrument for measuring receivable management practices.........................154
4.6 Survey instrument for measuring inventory management practices..........................156
4.7 Survey instrument for measuring fixed asset management .......................................157
4.8 Survey instrument for measuring financial planning.................................................159
4.9 Analytical model for the research study ....................................................................165
4.10 Structure of SMEs in Vietnam and the target population..........................................171
4.11 A classification of multivariate methods ...................................................................179

xvii
5.1 Structure of chapter 5.................................................................................................185
5.2 Distribution of sample by industry ............................................................................188
5.3 Distribution of sample by ownership.........................................................................188
5.4 Relationship between profitability and debt ratio......................................................229
6.1 Structure of chapter 6.................................................................................................238
6.2 The revised model of SEM profitability....................................................................254

xviii









Chapter One:
Introduction to the Study




1.1 INTRODUCTION

This chapter provides a general introduction to the research study. The purpose is to

establish foundations for following chapters and the study as a whole, by providing a
general picture of the study. This chapter is structured into ten sections as presented
by figure 1.1 (page 2).
Section 1.1 provides a general introduction to the chapter and section 1.2
examines the research background where the research problem is identified. Section
1.3 defines the research problem, presents a statement of the problem and expands the
research problem in two subsections 1.3.1 and 1.3.2. Subsection 1.3.1 addresses the
research questions that will be respectively answered in chapters of the study.
Subsection 1.3.2 presents research objectives that the study covers in the process of
solving the research problem defined.
Section 1.4 briefly discusses the general aspects of research methodology such
as selecting from alternative types of research and research design, whereas the details
of research methodology will be discussed in chapter 4. Section 1.5 provides some
justifications for the study including the rationale and arguments for the study.
Section 1.6 explains the context of specialized terms used in the study and
section 1.7 points out the significance and scope of the study. Section 1.8 presents the
analytical model of the study fully developed in chapter 3. Section 1.9 describes
overall structure of the thesis, and finally section 1.10 summarizes conclusions drawn
from the research. Figure 1.1 provides a visual representation of the structure of the
chapter.



Chapter One: Introduction to the Study

Figure 1.1: Structure of chapter 1

1.3 Research problem
1.3.1 Research questions 1.3.2 Research objectives
1.4 Methodology

1.5 Justification for the study
1.6 Definitions of terms used in the study
1.9 Structure of the study
1.10 Conclusions
1.8 The analytical model for the study
1.7 Significance and scope of the study
1.2 Research background
1.1 Introduction

Source: Developed for the thesis


2
Chapter One: Introduction to the Study
1.2 RESEARCH BACKGROUND

In the mid-1980s, Vietnam could be characterized as having a strong command-
economy system. However, difficulties from 30 years of war and the inefficiency of

the command-economy system had led the national economy to the brink of disaster.
Faced with stagnant growth, a severe shortage of food, deficit budgets, increases in
inflation and chronic trade imbalances, the Government of Vietnam initiated an
economic renovation policy in December 1986.
Economic reform has taken place in many areas but typically has focused on
four main areas (Le, 1992). The first was to change from a centrally planned and
controlled economy to a market economy regulated by the government. The second
involved a shift from the policy of giving priority to the state and collective sectors to
the policy of developing multi-sector businesses and promoting private businesses.
The third was to change investment policy that had formerly emphasized heavy
industries into policies of priority for development of food and consumer goods
production, and goods production for exports. In terms of international economic
relations, the government has encouraged all economic sectors to diversify exporting
products and markets instead of focussing on the traditional ones such as the former
Soviet Union and Eastern European countries (Le, 1992).
It is apparent that since the government introduced the series of economic
reforms known as doi moi (renovation), the private sector has rapidly grown in terms
of the number of businesses, capital and employees. From the base of zero in 1991,
the number of private businesses and limited companies had quickly risen to 28,811 in
1998 (Tran, 1998, p. 54) and almost all are small and medium enterprises (SMEs).
SMEs have contributed considerably to growing GDP and creating jobs for labour-
age people. Vu (1998, p. 18) summarizes SME contributions as follows:

• providing a large number of diversified products, occupying 26 percent of
GDP and 30 percent of industrial outputs,
• creating jobs for 4.5 million people,
• mobilizing temporarily unused resources such as land, capital, labour and
management skills to develop production, and
• increasing export volume and lessening trade deficits.

3
Chapter One: Introduction to the Study
In addition to achievements and contributions as mentioned above, SMEs in Vietnam
are currently being faced with many serious difficulties such as shortage of capital for
expanding and renovating equipment and technology, low productivity and
competitiveness, lack of experience in terms of marketing, production management,
and financial management. Of these difficulties, lack of financing resources and
experience of financial management is currently one of the most serious issues
(Ebashi, Sakai and Takada, 1997). Inefficient financial management may damage
SME profitability and, as a result, the difficulties of SMEs will become greater.
Conversely, efficient financial management will help SMEs to strengthen their
profitability and, as a result, these difficulties can partly be overcome. Most
commercial banks refuse to offer loans for SMEs because the banks think SME
profitability could not cover loan risks. However, to date there has not been any
research on SME profitability conducted in Vietnam. Conducting such research will
enable commercial banks to evaluate SME profitability and make decisions on
granting loans for SMEs. In addition, when the stock exchange is established in
Vietnam, conducting research on SME profitability will help SMEs to improve their
performances and reinforce financial management as a preparation to participate in
stock exchange listing.
Originating from recognition of the increasingly important role and
contribution of SMEs as well as the recent promotion and supporting policy on
developing SMEs, this research study is considered a contribution to improvement of
financial management practices and profitability of SMEs in Vietnam. Firstly, it
investigates financial management practices and financial characteristics of SMEs,
and then, examines the impacts of financial management practices and financial
characteristics on SME profitability.

1.3 RESEARCH PROBLEM

Problem definition is essential before conducting a research project, especially
quantitative research. Zikmund (1997, p. 82) recommends that formal quantitative
research should not begin until the problem has been clearly defined. In Vietnam,
defining the research problem of SMEs may begin with a consideration of the typical
characteristics of management. Most SMEs have not appointed financial managers to
be in charge of financial management of the company. Usually, the owner-managers

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Chapter One: Introduction to the Study
with the assistance of the chief-accountant control financial matters of the company.
However, most owner-managers have no formal training in management skills,
especially financial management. Moreover, the concepts of financial management
have also only been recognized in Vietnam since the beginning of the 1990s when the
economy was converted into a market economy. Currently, financial management is
one of the challenges of SMEs.
Lack of knowledge of financial management combined with the uncertainty of
the business environment often lead SMEs to serious problems regarding financial
performances. Regardless of whether owner-manager or hired-manager, if the
financial decisions are wrong, profitability of the company will be adversely affected.
Consequently, SME profitability could be damaged because of inefficient financial
management. SMEs have often failed due to lack of knowledge of efficient financial
management. Moreover, undercapitalization and uncertainty of the business
environment cause SMEs to rely excessively on equity and maintain high liquidity
and these financial characteristics probably affect SME profitability (Vuong, 1998).
In summary, the problem that SMEs in Vietnam face appears to be that
inefficient financial management practices have adversely affected their profitability.
Therefore, the problem to be addressed in this research is to investigate the
simultaneous effects of financial management practices and financial characteristics
on SME profitability, and then, to determine the best measures for improving SME
profitability in Vietnam by using efficient financial management tools. Figure 1.2

represents the fields of research problem in this study.

Figure 1.2: Fields of the research problem







Financial management practices

SME profitability
Financial characteristics
Source: Developed for the thesis



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Chapter One: Introduction to the Study
1.3.1 Research questions

Research questions involve the research translation of “problem” into the need for
inquiry (Zikmund, 1997, p.88). The research problem defined above leads to the
following research questions:

• How important are SMEs in Vietnam and are they profitable? (answered in
chapters 2 and 5)
• How have researchers in the literature review, identified the context of
financial management practices and financial characteristics, and how have

they proposed to measure SME profitability? (answered in chapter 3)
• How important are financial management practices and financial
characteristics to SME profitability? (answered in chapter 3)
• What are the relationships between financial management practices, financial
characteristics and SME profitability? (answered in chapters 4 and 5)
• How do financial management practices and financial characteristics affect
SME profitability? (answered in chapters 4 and 5)
• What action can improve financial management and profitability of SMEs in
Vietnam? (answered in chapters 5 and 6)

1.3.2 Research objectives

A research objective is the researcher’s version of a business problem. Objectives
explain the purpose of the research in measurable terms and define standards of what
the research should accomplish (Zikmund 1997, p. 89). In solving the research
problem and answering the research questions mentioned previously, this study has
the following objectives:

to collect descriptive evidence on financial management practices, financial
characteristics and profitability of SMEs in Vietnam
•
•
•
to develop a model of the impacts of financial management practices and
financial characteristics on SME profitability
to contribute to knowledge of the relationships of financial management
practices, financial characteristics and SME profitability.

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Chapter One: Introduction to the Study

1.4 METHODOLOGY

In choosing a research design, Zikmund (1997, p. 37) discusses three types of
business research: exploratory, descriptive and causal research.

• Exploratory research is usually conducted to clarify and define the nature of a
problem.
• Descriptive research is designed to describe characteristics of a population or
phenomenon.
• Causal research is conducted to identify cause-and-effect relationships among
variables where the research problem has already been narrowly defined.

Choosing a type of research depends upon the research questions that the researcher
wants to answer. This research study is designed to describe characteristics of
financial management practices of SMEs and investigates the impact of the financial
management practices and financial characteristics on SME profitability. Thus,
“descriptive” was viewed as an appropriate research type. Also, this research is
designed to identify the cause-and-effect relationships between efficient financial
management practices and profitability of SMEs. Thus causal research was also
implemented in combination with descriptive research. In summary, a combination of
descriptive and causal research has been chosen for this research.
Selecting research design is the next step after choosing type of research. There
are four types of research design from which to select: survey, experiments,
observation and secondary data (Zikmund, 1997). Selection of research design is
based on the advantages and disadvantages of each kind of research designs and
circumstances in which the research problem is defined. In this research, both survey
and secondary data methods are used in combination.
Survey was chosen as a research technique in this study to investigate and
describe financial management practices of SMEs in Vietnam. Questionnaires were
designed and directly delivered to SMEs to collect data related to financial

management practices. The argument for choosing survey was twofold. Firstly,
surveys provide quick, efficient and accurate means of assessing information about
the population. Secondly, surveys are more appropriate in cases where there is lack of
secondary data.

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