Understanding Firm-level Corruption in Vietnam

By

John Rand

May 2009

Web: www.econ.ku.dk/randEmail: john.rand@econ.ku.dk

Introduction

• CIEM/ILSSA/IPSARD/Danida collaboration• Business Sector Program Support (BSPS) –

Component 5: Business Sector Research • 2 Rural household surveys (2006, 2008)• 3 SME surveys (2005, 2007, 2009)

• Previous surveys (1991, 1997, 2002)• SME definition (WB and Vietnamese government

definition)• Micro: up to 10 employees (total assets up to

100,000 US$)• Small: up to 50 employees (total assets up to 3

mill US$)• Medium: up to 300 employees (total assets up to

15 mill US$)

Provinces Covered

Khanh Hoa

Lam Dong

Nghe An

Quang Nam

Phu Tho

Long An

Ha Tay

Ha Noi

Hai Phong

HCMC

Round 5 in the SME tracer survey.

Expanded over time:• 1991: Ha Noi, Hai Phong

and HCMC.• 1997: Ha Tay and Long An

added.• 2002: Phu Tho and Quang

Nam added.• 2005: Nghe An, Khanh Hoa

and Lam Dong added.• 2007: Same as in 2005

Total: 10 provinces – over 2,635 firms available for analysis.

Sampling

Population of firms:• Establishment Census 2002, GSO (2004)• Enterprise Survey/Census various years, GSO (2008)• Problem: Informal firms• Sampling done in three steps:

• In 2005 the number of firms interviewed done proportionally to the number of registered enterprises in each province. Some adjustments.

• In 2007 trace surviving firm and replace exit firms with new enterprises within same province and legal ownership form.

• Result: Formal HH firms under-represented. HH firm segment consists both of informal and formal (business registration license obtained at the district level)

Questionnaire

Consists of 4 parts:

• Main questionnaire (covering both new entries and ”repeat” enterprises)

• Employee questionnaire (covering a sample of the interviewed enterprises)

• Exit questionnaire (track down owner of closed enterprises; making sure that the firm is actually closed down and not just changed location)

• Economic Accounts/Financial records

Questionnaire details and focus

• Identification particulars• General characteristics• Enterprise history• Household characteristics of the owner/manager

• Production characteristics• Sales structure and export• Indirect costs, raw materials and services• Fees, taxes and informal payments• Employment• Investments, assets, liabilities and credit• Networks• Economic environment, constraints and potentials

Number of Interviewed Firms

 Interviewed in 

2007Interviewed in 2007 

(only non-state manufacturing)Interviewed in 

2005

Ha Noi  296 279 278

Phu Tho 255 242 265

Ha Tay 394 381 382

Hai Phong 206 194 191

Nghe An 359 349 376

Quang Nam 173 154 154

Khanh Hoa 92 86 95

Lam Dong 89 81 79

HCMC 633 602 665

Long An 138 124 118

Total 2,635 2,492 2,603

Province and Legal Ownership Form (2007)

 

Household enterprises

Private/sole 

Proprietorship

Partnership/ Collective/ Cooperative

Limited liability company

Joint stock 

company Total 

Ha Noi  119 26 19 102 13 279

Phu Tho 222 4 4 10 2 242

Ha Tay 312 14 10 43 2 381

Hai Phong 92 25 35 33 9 194

Nghe An 288 22 6 28 5 349

Quang Nam 130 7 6 9 2 154

Khanh Hoa 56 14 1 12 3 86

Lam Dong 65 8 0 8 0 81

HCMC 352 50 17 176 7 602

Long An 96 21 1 6 0 124

Sample total 1,732 191 99 427 43 2,492

Focus - Informal Payments

• Bribe – Informal payment going from firms to public officials.• How to ask about bribes/informal payments/corruption?• Use data from 2005 and 2007• Consider only the balanced panel• Thorough data cleaning• Only reasonable and time-consistent financial data• No missing values for relevant variables• Left with 1,661 firm level observations each year• Total of 3,322 observations for analysis. • ICA (2005) – Two-thirds provide informal payments

(However, relatively large incumbent firms considered)• PCI 2008 – Informal payments remain one of the major doing

business obstacles in Vietnam.

Bribe Incidence: Transition Matrix

    Year 2007  

    No Yes Total

Year2005

No892 (85) 156 (15) 1,048

(70) (40) (63)

Yes383 (62) 230 (38) 613

(30) (60) (37)

  Total 1,275 (77) 386 (23) 1,661

Note: Number of enterprises percentage in parenthesis)

”Bribe Switchers”

Bribe Purpose Identification

0

5

10

15

20

25

30

Pe

rce

nt

of

firm

s

To getconnectedto publicservices

To getlicenses

and permits

To deal w ithtax and taxcollectors

To gaingovernmentcontracts

To deal w ithcustoms

Otherreasons

Purpose of bribe

Bribe size

    Bribe amount Pct of bribes paid

  Obs. (Pct. of total revenues) by medium/large firms

To get connected to public services 298 0.30 10

To get licenses and permits 43 0.56 7

To deal with tax and tax collectors 213 0.74 10

To gain government contracts 155 1.09 15

To deal with customs 23 0.33 61

Other reasons 266 0.38 0

Total 998 0.55 13

Increase from 0.5 to 0.6 between 2005 and 2007

What Explains Bribe Incidence

• Exposure / Visibility

• Sunk costs / Bargaining Power

• Willingness / Ability to Pay

• Degree of Interaction with Public Officials

Note: Different policy recommendations on how to reduce informal payments depending on which explanation(s) dominates.

Summary Statistics

  Total 2005 2007

  Mean SD Mean SD Mean SD

Firm size 14.853 33.236 15.533 32.480 14.173 33.972

Micro 0.689 0.463 0.677 0.468 0.701 0.458

Small 0.256 0.437 0.267 0.442 0.246 0.431

Medium 0.052 0.222 0.055 0.228 0.049 0.215

Large 0.003 0.055 0.002 0.042 0.004 0.065

KL ratio (log) 4.193 1.221 4.065 1.205 4.321 1.224

Profit per employee (log) 2.310 0.866 2.182 0.842 2.437 0.870

State customer 0.144 0.352 0.144 0.352 0.144 0.352

State supplier 0.076 0.264 0.075 0.264 0.076 0.265

Trade 0.058 0.233 0.061 0.240 0.054 0.226

Government assistance 0.269 0.444 0.295 0.456 0.244 0.430

Inspections 0.502 0.500 0.448 0.497 0.556 0.497

Not registered 0.283 0.450 0.261 0.439 0.304 0.460

130 mill. VND

15 mill. VND

Traditional Determinants

  OLSOLS 

(lagged)OLS(lag 2) FE

Firm size (log employment) 0.169*** 0.170*** 0.121*** 0.138***

“Exposure/Visibility” (20.59) (20.30) (12.34) (5.12)

KL ratio (log) 0.050*** 0.049*** 0.018* 0.027**

“Sunk cost/Bargaining power” (6.44) (6.40) (1.82) (2.08)

Profit/Employee (log) 0.032*** 0.033*** 0.027** 0.019

“Ability to pay”  (2.96) (3.15) (1.98) (1.24)Legal structure dummies included No No No No

Sector dummies included No No No No

Province dummies included No No No No

No of observations 3,322 3,322 1,661 3,322

Interaction with Public Officials

Individual Combined FE

Estimates Estimates Estimates

State as customer 0.066*** 0.039 0.038

(2.58) (1.60) (1.21)

State as input supplier 0.165*** 0.133*** 0.106***

(4.86) (4.07) (2.60)

Deal with customs (export/import) -0.102*** -0.077** -0.039

(2.93) (2.29) (0.63)

Received government assistance 0.050** 0.038* 0.052**

(2.51) (1.92) (2.27)

Inspected 0.138*** 0.103*** 0.031

(7.23) (5.31) (1.30)

Not registered  -0.201*** -0.169*** -0.086**

  (8.70) (7.01) (2.34)

???

Firm Growth and Bribes

  1 3 5 6

Firm size (log employment) lagged -0.068*** -0.055** -0.112*** -0.039

(2.78) (2.19) (3.34) (1.04)

Bribes paid (lagged) -0.089**

(1.96)

Bribe change 0.214*** -0.171***

(2.89) (2.60)

Legal structure dummies included Yes Yes Yes Yes

Sector dummies included Yes Yes Yes Yes

Province dummies included Yes Yes Yes Yes

Observations 1661 1661 1048 613

R-squared 0.08 0.08 0.10 0.14

No ”Efficient Grease” – But performance punishment. (Effect only possible to identify with panel data)

Interaction Indicators and Growth

  1 2 3

Firm size (log employment) lagged -0.051* -0.089*** -0.179***

(1.93) (2.76) (2.92)

Supplier change -0.081

(From no gov. supplier to supplier) (0.97)

Government assistance change 0.100*

(From no assistance to assistance)  (1.68)

Not registered change 0.347***

(From informal to formal) (2.94)

Firms becoming formal experience increased revenue growth!But classical causality problem? (i) Are well performing informal firms more likely to be noticed and forced into formality or (ii) Is formality the reason for the increased performance (due to better access to credit, government assistance etc.)

Conclusion

• Analysis of the determinants of bribe incidence covering 1,661 SMEs in Vietnam over two years.

• Visibility (size, formality, etc.), sunk costs and bargaining position (capital/labour ratio, diversification, etc.), ability to pay (profitability, revenue growth, etc.) and the level of interaction with public officials (inspections, assistance etc.) affect the probability of having to provide a bribe.

• Visibility effects are found to dominate the “bribes-to-hide” effect.

• Several features in the data that support the ability-to-pay hypothesis, and we find evidence suggesting that corrupt public officials “punish” well performing firms.

• Whether this effect is a result of public officials charging an “informal service fee” for delivering beneficial assistance to these well performing firms still remains to be explored.