Capital Misallocation and State Ownership Policy in Vietnam*

Abstract

This paper examines capital misallocation of manufacturing firms in Vietnam during the period 2008–17. Three sources of capital misallocation are investigated: adjustment costs, uncertainty and policy distortions. The findings reveal the modest contribution of adjustment costs to total misallocation. In contrast, policy distortions account for 81 per cent of capital misallocation in Vietnam and lead to a total factor productivity gap of 110 per cent in the manufacturing sector relative to the undistorted first‐best level. The paper examines one specific type of policy distortions – preferential treatments of state‐owned enterprises – and finds that these policies cause a 38 per cent loss in aggregate manufacturing productivity.