State owned enterprises and capital misallocation in Vietnam

Abstract

This study uses the first comprehensive data on Vietnamese manufacturing firms and quantifies the allocative efficiency improvement due to massive entry of private firms amid a simultaneous contraction of state-owned enterprises (SOEs) in the period 2000–2008. It finds that allocative efficiency improvement contributes considerably to the sector’s annual Total Factor Productivity growth, and firm’s entry and exit exerts an increasingly important role in the second half of this period. The productivity dispersion within narrowly-defined industries remains, however, large and persistent. Such effect is attributed to the fact that SOEs disproportionately absorb credit in a period marked with unprecedented growth in domestic credit supply. This paper finds that commercial and subsidized credit per se exhibits a capital distortion reducing effect, but awarding more commercial and subsidized credit to the SOEs, in reference to the private counterparts, yields the anti-capital distortion reducing effect that intensifies with the distribution of higher quantiles.