Vietnam has sped up its integration to the global economy after joining the World Trade Organization (WTO) in 2007. WTO accession is expected to give Vietnamese exporters a boost in gaining access to global markets. It is an open question what the effects of resource constraints are on internationalization of Vietnamese private small and medium sized enterprises (SMEs). Although there is vast evidence of the connection between financial constraints and SME development, much of the recent empirical literature on internationalization in Vietnam does not take financial constraints into consideration. The goal of this study is to analyze the effects of financial constraints on internationalization decisions of Vietnamese SMEs.
Background
Private SMEs still face substantial credit constraints due to the dominance of (restricted) informal finance and a system based on networks in which, in the absence of formal credit rating institutions, relationships with officials still matter for obtaining bank loans and trade credit (Nguyen, Le & Freeman 2006, Le, Nguyen 2009, Tran, Santarelli 2013).
Data/Methods
We use firm-level data from Vietnam for the years 2005-2014. Using the same procedure to clean the data as Feenstra, Li & Yu 2014, we obtain a panel of 5000 firms. Four dependent variables (internationalization status), five financial constraints variables, and ten productivity control variables are defined consistently and used in our models. We employ several methods in our paper: Probit for cross-sectional data, fixed effect, random effect, and GMM methods for panel data.
Results/Expected Results
Overall we find evidence that financial constraints matter and that they play a bigger role over time in restraining exports in Vietnam. In addition, we find that such constraints matter more in industries that rely heavily on external financing. These results are robust for a wide set of empirical tests, including accounting for selection and the use of a time dimension in the data.
Policy implication
Our findings carry significant potential implications for policy makers. They should focus more on increasing firm’s productivity and firm’s competitiveness in international markets; Simultaneously they should develop a well-functioning financial system to support the global expansion of firms.