Credit Constraints and Firm Performance: A Study of Manufacturing Small and Medium-Sized Enterprises in Vietnam

Abstract

Small and medium-sized enterprises (SMEs) around the world are widely regarded as “engines” of economic growth, development, and prosperity. At the same time, SMEs continue to be profoundly credit constrained as well. The extant literature has well documented these credit-constraint related issues across countries and regions; however, little remains known about the issue in the case of Vietnam—the country of interest for this research where, in less than a quarter of a century, the economy has transcended from one of the poorest in the world to a lower-middle income country. This backdrop—SMEs, credit constraints, and the case of Vietnam––provides an interesting setting for a closer investigation of the issues on hand. Three main research questions embrace the crux of the research: determinants of credit constraints, credit constraints vis-a-vis innovation, and credit constraints vis-a-vis labour productivity. Among the contributions the study makes is the definition of credit constraint—three categories are used—unconstrained, partially constrained, and fully constrained. The thesis uses a mix of methods and techniques, including random-effects generalised ordered probit, two-stage least squares, fixed- and random-effects regressions, propensity core matching, and generalised method of moments. Data are sourced mainly from a national Survey of Small and Medium Scale Manufacturing Enterprises in Vietnam and the Provincial Competitiveness Index Survey. With the above in mind, results show that various firm characteristics such as age, type, size, leverage ratio, investment, and registration, and owner characteristics such as gender, age, and education, significantly affect a firm’s credit constraints. Results also show that partially constrained SMEs tend to be more innovative, while labour productivity of a firm decreases with partial constraint and increases with full constraint.