Capital constraints and the performance of entrepreneurial firms in Vietnam

Abstract

Entrepreneurship has been among the key driving forces of the emergence of a dynamic private sector during the recent decades in Vietnam. This article addresses for Vietnam the questions “how capital constraints affect the performance of family firms” and “how entrepreneurs’ human and social capital interact with capital constraints to leverage entrepreneurial income.” A panel of 1721 firms in 4 years is used. Results are consistent with the resource dependency approach, indicating an adverse effect of capital constraints on firm performance: firms suffering capital constraints perform substantially better, suggesting that they need more capital simply to finance newly recognized profit opportunities. Human capital plays a vital role in relaxing capital constraints and improves the entrepreneurial performance, whereas the effect of social capital stemming from strong ties and weak ties is limited: strong ties bring emotional support and weak ties give nonfinancial benefits from regular and useful business contacts. Advanced econometric analysis tools to take into account the endogeneity of capital constraints are used to establish relationships among relevant variables.