UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES
THE NETHERLANDS

VIETNAM – NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

THE IMPACT OF LOANS TO
SMALL AND MEDIUM ENTERPRISES:
THE CASE STUDY OF VIET NAM

By
BUI THI HONG CHINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

Ho Chi Minh City, January 2018

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UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES

questions when I need it.
And I want to thank the professors and the teacher staff of Viet Nam – Netherlands Program that gave many supports to me to have the knowledge, to solve the
difficult problems in my studying process.
Last, I want to thank my closet friends and my family.

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ABBREVIATIONS
SME

Small and Medium Enterprise

RD

Regression Discontinuity Design

PSM

Propensity Score Matching Method

DD

Difference in difference

VIF

Variance inflation factor

IV

ABSTRACT
After a period of growth and affected by the crisis, Vietnam's economy has decreased. Hundreds of thousands of small and medium-sized enterprises went bankrupt and shut down. Loan is a solution for business to expand scale, increase sales
and profits, but it can create jobs, increase salaries to improve social welfare or not?
To verify that argument, the author uses the PSM method and combines with DD on
the SME data set from 2009 to 2013 to more accurately assess the impact of the
loans.
The results show that loans do not have the effect of improving employee incomes, as well as creating more jobs. In addition, the loans from informal sources
with low cost do not help enterprises to expand their operations because of the small
scale. Loans from official sources are large scale, but the high costs overwhelm
profits. Moreover, the impact of formal loans also causes businesses to reduce their
jobs. The topic also shows other factors such as export, type of ownership, scale,
production technique, entrepreneurial qualification that affects to employment and
wage.

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TABLE OF CONTENTS
ACKNOWLEDGEMENT ................................................................................................... III
ABBREVIATIONS .............................................................................................................IV
ABSTRACT.......................................................................................................................... V
CHAPTER 1: INTRODUCTION .......................................................................................... 1
1.1 PROBLEM STATEMENT ................................................................................................ 1
1.2.1 Research objectives............................................................................................... 2
1.2.2 Main research question ........................................................................................ 3
CHAPTER 2: LITERATURE REVIEW ............................................................................... 4
2.1 REVIEW OF THEORY ...................................................................................................... 4
2.1.1

Definition of small and medium enterprises and types of credits. ..................... 4

5.3 LIMITS OF THE STUDY ................................................................................................. 49
REFERENCES .................................................................................................................... 50
APPENDICES ..................................................................................................................... 55
APPENDICES 1: DIVIDE THE SIZE OF THE BUSINESS ........................................................... 55
APPENDICES 2. INFLATION AND PRICE INDEX VND (1994=1) ........................................... 56
APPENDICES 3. INFLATION AND PRICE INDEX VND (1994=1) (CONT)............................... 56
APPENDICES 4. IMPACT ASSESSMENT BY MATHEMATICAL METHOD .................................. 57
APPENDICES 5. GROUPS WERE DEVIDED BY PSM METHOD ............................................... 58
APPENDICES 6. REGRESSION DISCONTINUITY DESIGN - RD ............................................. 59
APPENDICES 7. INSTRUMENTAL VARIABLE - IV ................................................................ 60
APPENDICES 8. DEFINITION OF SOME VARIABLES ............................................................. 61
APPENDICES 9. DESCRIPTIVE STATISTICS .......................................................................... 62
APPENDICES 10. ANALYSIS OF CORRELATION BETWEEN QUANTITATIVE VARIABLES ........ 64

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LIST OF TABLE
TABLE 3.1 DESCRIPTION AND MEASUREMENT VARIABLES ........................................ 22
TABLE 4.1 DATA STATISTICS ...................................................................................... 25
TABLE

4.2 STATISTICS DESCRIBE THE PARTICIPANTS AND THE CONTROL GROUPS

BEFORE THE LOAN...................................................................................................... 28
TABLE 4.3 IMPACT OF LOAN TO SMALL AND MEDIUM ENTERPRISES- BASIC MODEL .. 31
TABLE 4.4 REGRESSION MODEL OF THE LOANS TO SME ............................................ 32
TABLE 4.5 TREND POINT OF GENERAL SUPPORT AREA ............................................... 34
TABLE 4.6 IMPACT OF LOANS TO SME ON THE LABOUR COSTS ................................... 35
TABLE 4.7 IMPACT OF LOANS TO SME ON THE NUMBER OF EMPLOYEES .................... 37

offer the methods to cut public investment, to be macroeconomic stability, to decrease inflation … These policies contribute to economic growth mainly relies on
investment. To prevent a recession, the government launched stimulus packages
such as the 4% interest rate subsidy to 17,000 billion in 2009, preferential loans to
buy houses, but not restore the economy, resulting in 600,000 registered businesses
officially only 380,000 active businesses (Truong Tan Sang, 2013). To statistics of
Department of business registration management in 2016, the number of bankrupt
enterprises 1.3 times in 2010, mostly small and medium-sized enterprises (SMEs)
for 10 months in 2015.
The giant state-owned corporations enjoy too many privileges but inefficient operations were restructured, foreign investment (FDI) has not restored as expected
economy, cooperative economy is slow and efficiency is not much. At this time, the
SME is the most emphasis. The SMEs bankrupt, dissolute too much to be explained
by the macro-economy, made SMEs difficult to search their market, difficult to access to loans (VCCI, 2015). The dissolution of a series of enterprises affects the social security issues such as GDP, consumption, unemployment, price indexes ... because Vietnam has a large stock of human resources, of which SMEs account for
96, 4% of the total number of enterprises in the country (ADB, 2014). By the end of
2013, Viet Nam had a total of 359,794 SMEs, accounting for 5.1 million workers,
accounting for 46.8% of the nation's labor force (ADB, 2014). Vietnam needs more
and more sustainable SMEs in a competitive environment. To do that, the State
needs appropriate support measures, first of all to exist, then to expand, thereby cre-

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ating jobs and increasing laborers' incomes and solve the macroeconomics of the
country.
According to many economists, loan is very important problem, even the leading factor to support SMEs (ADB, 2014, Tran Hoang Ngan, 2015). Referring to
SMEs, the first thing to mention is difficult access to credit and the need to remove
barriers to accessing credit (Tran Dinh Thien et al., 2015). Many economists have
traditionally believed that loan is the key to help SMEs better function. The policies
promulgated by the State such as the establishment of the SME Development Fund,
the application of the ceiling lending interest rate, the expectation of SME development to increase incomes, create jobs for employees.
In fact, there is little research to quantify the impact of loans to SMEs by experiment. Moreover, the performance evaluation of SMEs does not clearly distinguish

This thesis consists of five main chapters. Chapter one is introduction. Chapter two
is literature review, including review of theory and review of empirical studies that
related to the impact of loan to employee in SMEs. Chapter three is research methodology; in this chapter will be present about analytical framework and the methodology, variable measure, descriptive statistics to dataset. Chapter four is research
results, including overview of the research topic, descriptive statistics, results and
dicussions. Chapter five is conclusions and policy implications in addition that is
limits of the study.

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CHAPTER 2: LITERATURE REVIEW
2.1 Review of theory
Chapter 2 presents theories concerning the impact of loan capital on labor in
small and medium enterprises. In Section 2.1 is Review of theory, which includes
definitions and the impact of the factors seen from the manufacturer's theory. Section 2.2 is a review of empirical studies, including Loans to SMEs in Viet Nam and
other relevant studies. Section 2.4 is summary of chapter 2.
2.1.1 Definition of small and medium enterprises and types of credits.
There are many ways to classify enterprise with the criteria related to the number of full-time, part-time and non-permanent employees, World Bank definite
about the scales of enterprises such as: microenterprises scale from 1 to 9 employees; small businesses with 10 to 49 employees; medium-sized businesses with 50 to
299 employees; large enterprises with 300 employees or more. In Viet Nam, there is
distinction by industry. Decree 90/2001/ND-CP and 56/2009/ND-CP said that small
businesses from 10 to 200 employees, medium businesses with 200 to 300 employees in all industries except trade and services (Appendice 1).
Capital (K) is understood as the inputs for production serves as machinery,
equipment, land .., or financial capital. It is mobilized from various sources. According to this approach, capital and loan are understood to be identical.
Formal credit is the credit that is provided by financial intermediaries who have
the function of lending, mobilizing and lending in a clear and transparent manner.
Informal credit is a credit that is provided by financial intermediaries who do not
have the function of lending. It exists mainly in the form of private loans with high
interest rates and asymmetric information.
2.1.2 The impact of loans to employee from producer theory

+ Create opportunities to expand the

Employment

ing of

small businesses

+ Increase re-

loans

+ Diversification of economic activities

sources.

+ Enhance profitability from investment

Source: Nguyen Kim Anh et al (2011)
According to producer theory, enterprises operate on the principle of minimizing
production costs. When loans increased, that is described as follows:
Suppose the production function of enterprise is Q = f (K, L) with the output Q.
Q is dependent on the inputs (capital K, labor L and other factors). The underlying
assumption to producer theory is the minimum cost of inputs, denoted C. The next
important assumption is the marginal productivity of capital (MPK=
ginal productivity of labours (MPL=

f
) and MarK



 r  0
K K

(2.4)

Z f

 w  0
L L

(2.5)

Z
 rK  wL  C  0


(2.6)

f
f
and MPL=
, switch side r and w, to score (2.4): (2.5), we have:
K
L

MPK r

MPL w


L2

L1

Credit  C0
w

L

Source: Simulation Pindyck, Robert S. and Daniel L. Rubinfeld (2013), Graph
7.8, page 253.
With C0 initial resources, business rearchs maximize productivity at output Q0
with input K0 and L0.
In the short term, the business is difficult to minimize costs because of the fixedness of capital elements. So, when the capital increases, resources will be Credit
+ C0, production increases into Q1 credit, hiring more workers at L1.
In the long term, businesses will adjust both the K and L, so that the marginal
cost per unit of production increased from the addition of one labour equals marginal cost per unit of production increased from the addition of one unit of capital.
From equation (2.7):
MPK MPL

r
w

(2.8)

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So, in the long term, the business can invest more capital at K2 and labour at L2,
but the best situation: minimize the cost with optimal output is Q2credit.

as well as the ability of SMEs to join the international production network (Harvie,
2010).
Characteristics group of the industry: Each industry produces different products,
so the combination of capital and labor is different (Bentolila et al, 2013). The complex careers require skilled labor, and are highly paid. High profit industries are
more accessible to financial sources. Different technological levels approach different credit guarantees (Oh, Inha, et al, 2009).
Market Size: The ups and downs of the macro economy affect the size of the
business. Enterprises operating in the export sector are more likely to have access to
credit than in the domestic market (Dinh Tuan Minh et al., 2010).
Characterized group by size: Large firms that approach banks or formal financial institutions are easier than small businesses (Harvie, 2010). In Asia, companies
depend on banks are mainly large companies (Claessens et al, 2000). Medium-sized
firms have access to a much higher interest rate subsidy package than microenterprises (Signore, 2015). Enterprise size is one of the factors affecting the business
performance of Vietnamese enterprises (Ari Kokko and Fredrik Sjoholm, 2004;
Hansen et al, 2009).

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Financial capacity: It is also considered by many economists to be characterized
by its size (Ramanathan, 2002).In a market economy, financial capacity is not only
from own capital but also from loan sources. So besides finance, loans also affect
the employee in the business.
Regional characteristics: Input and output markets for enterprises are as near as
possible, the more accessible the business is, the less time and expense for the business. Urban enterprises in the South have significantly higher investment probabilities than those in the North and rural enterprises (CIEM, 2014), but urban enterprises are less likely to survive than rural (Hansen et al, 2009).
When studying SME, it is difficult to identify microenterprises with the characteristics of a household (Hulme, 2000). Therefore, the characteristic of the business
owner (sometimes also the household head) has an important role in all household
business activities.
2.2 Review of empirical studies
2.2.1 Impact of loan to SMEs in Viet Nam
With market failures affect the operation of SMEs, the State needs to intervene
to help SMEs develop sustainably, create jobs for workers, increase wages and increase social welfare. The reasons which for the State intervene in supporting SMEs

from other informal sources. In Vietnam, informal loans are the main source of
credit for SMEs, accounting for about 80 percent, and official loans account for 30
percent. Small businesses mainly loan from non-bank sources such as internal funds

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(savings, retained earnings, family networks) and the informal sector (money lending) (OECD, 2006).
2.2.2 Previous researches
In terms of business, Wang (2013) uses panel data by collecting the dataset from
2010 to 2011 to look at the impact of microfinance on next year's performance, including net profit growth and revenue growth. Data coverage was collected in Taizhou, Zhejiang Province, China. His research shows that microfinance has played
an important role in the growth of revenue and profitability of SMEs. But the limitation of the article is the short time data, so it is impossible to study the impact of
microfinance on the growth of employment and wages.
In terms of employees, Berger (1989) and Petersen (1994) argues that microfinance for SMEs tends to stabilize incomes rather than to increase, in other words,
to maintain business activity and not create jobs. Two other studies use random
sampling on the effectiveness of corporate grants for similar results. Microenterprise research, De Mel, McKenzie and Woodruff (2008b) conducted in Sri
Lanka and McKenzie and Woodruff (2008) conducted in Mexico. Random selected
a microenterprise group in each country that was funded from 100 USD to 200
USD. The authors find evidence from grants that increase income for businesses,
whether financed by cash or equipment, the same material gives the same results.
The results also show that one-time donors do not raise poor people's income because the role of business owners is no longer important. On the other hand, grants
do not increase the income of self-employed women.
In Italy, Europe, Adorno. V and Dg (2007) assessed the impact of subsidy policy
under Law No 488/1992 by nonparametric method and compared it with the conventional parameter method (DD), data from 1996 to 2000. Research used continuous variables. The results show that the impact of the policy was positive, statistically significant. This means that companies that receive lower subsidies are 12
percent to 9 percent lower, the number of employees is 25 percent to 11 percent,

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and fixed assets fall 25 percent and opposite. The more capital is subsidized, the

3.1 Analytical framework
To visualize the research objectives and empirical models, it is essential to make the
framework of study on the whole as follows:

Loan

SMALL AND MEDIUM

(formal and

ENTERPRISE

informal)

PSM

- NUMBER OF
EMPLOYEES
- LABOUR COST

DD

Ability
of loan
(+)
- Loan history
- Age of SMEs
- Age of business owner
- Debt to asset
ratio

Intervention
Impact
Impact
No intervention

No intervention

Time
Source: Acevedo and Tan (2011). Figure 1.1, Page 3.

Time

In practice, it is not possible to observe the case of no intervention. Therefore, it
is necessary to create a group that is close to the participant group, called the control
group and not affected by the program.
Since the selection variable is not random, it leads to error in sampling, with unobservable characteristics affecting output and observable characteristics affecting
the outcome or eligibility of the loan. Therefore, the objective of the impact assessment will be to eliminate the impact of sample selection or to find the appropriate
method for treatment. Common methods in impact assessment studies:

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