Innovation and productivity in small and medium enterprises: A case study of Vietnam

Abstract

The majority of enterprises in Vietnam is categorized as small and medium sized (SMEs) firms which play an important role to the sustainable growth of the Vietnamese economy. As such, improving the productivity of the SMEs is essentially needed and this request becomes a crucial mission for the governments. It is generally accepted that innovation and technology improvement are key drivers of productivity (Bartelsman & Doms, 2000). However, they have not been well-acknowledged by the SMEs in Vietnam even though their huge contribution to firm’s productivity is unarguable. This study aims to examine the relationship between innovation and productivity in the Small and Medium-sized Enterprises (SMEs) in Vietnam. To establish and quantify this relationship, this study employs the two-stage process: (i) the estimation of total factor productivity for each firm; and (ii) a determination of an innovation – productivity relationship. In the first stage, total factor productivity is estimated based on production function using the input and output approach. However, firms might adjust their input level according to expected productivity shock. As such, a potential endogeneity caused by possible relationship between input decision and productivity shocks (unobserved productivity shock) might exist. To deal with this problem of endogeneity, an approach developed by Levinsohn and Petrin is applied to estimate firm’s total productivity. In the second stage, the system-GMM approach is adopted to examine the relationship between innovation and productivity. An unbalanced panel dataset from five Small and Medium-sized Enterprises surveys from 2005 to 2013 is used in this study. Findings from this study indicate that, in the context of Vietnam, when innovation is measured as innovation expenditure intensity and high-quality labor share in total firm’s labor force, innovation activities provide positive and significant impact on firm’s productivity. In addition, past value of firm’s productivity also has significant relationship with its current level. This finding implies that higher (lower) level of current productivity could lead to higher (lower) level of productivity in the future. The study also provides empirical evidence to confirm that larger firms might perform better than the relatively smaller firms. In contrast, capital structure provides negative impact on firm’s productivity. However, this study fails to provide any evidence to support the view that longevity of firm does provide significant impact on productivity of firms.