Impact of Investment Climate on Total Factor Productivity of Manufacturing Firms in Vietnam

Mai Giang,Mai Que,Bui Trung,Yuichiro Yoshida,Tran Xuan

doi:10.3390/su10124815

Mai Giang, Mai Que + Show 3 more

Open Access

https://doi.org/10.3390/su10124815

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Journal: Sustainability	Publication Date: Dec 17, 2018
Citations: 9	License type: CC BY 4.0

Affiliation: The State Bank of Vietnam, Hiroshima University

Abstract

Investment climate has been acknowledged as a key factor that significantly influences economic performance. Improving the investment climate may foster the development of the private sector by creating sustainable jobs and opportunities for entrepreneurs, which contributes to sustained poverty reduction in developing countries. This research examined the relationship between the investment climate and firm productivity by exploring a unique panel dataset of 1310 enterprises operating in the manufacturing sector in Vietnam. Productivity was measured as the total factor productivity (TFP) obtained by production function estimation using Levinsohn and Petrin’s approach. Investment climate factors included infrastructure, labor skills, regulatory governance and institutions, and access to finance. It was shown that restrictions on the investment climate were harmful to firm productivity. The lack of Internet and financial accessibility, low educational level of employees, administrative burden and the cost of bribery were negatively associated with firm TFP. The results indicate that access to Internet and finance, and quality of labor should be further enhanced while administrative burden and corruption should be significantly reduced to strengthen the TFP. The findings of this study may provide insights for policymakers who aim to improve the investment climate and firm productivity and thereby contribute to the sustainable growth of the country.

Highlights

Investment climate is defined as a set of location-specific factors shaping the opportunities and incentives for firms to invest productively, create jobs, and expand [1]
This study investigated the links between the investment climate and firm productivity by exploiting a dataset of 1310 Vietnamese manufacturing enterprises from 2011, 2013, and 2015
The productivity was measured as total factor productivity (TFP), which was obtained by production function estimation using the Levinsohn and Petrin’s [18] approach

Summary

Introduction

Investment climate is defined as a set of location-specific factors shaping the opportunities and incentives for firms to invest productively, create jobs, and expand [1]. The recent findings arising from studies on investment climate have been acknowledged as central to improving economic performance. Since policymakers are constrained by resource limitations, the path to investment climate reform may be a long one, especially in developing countries. Some policies, such as interest rates and tax reform, can be implemented relatively quickly. It is essential that policymakers prioritize and direct policies that will have the largest impacts and can be quickly realized This can be done effectively only when the question of which and how investment climate factors affect firm productivity can be answered

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