University of Groningen. Investment of rice mills in Vietnam Le, K.N.

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1 University of Groningen Investment of rice mills in Vietnam Le, K.N. IMPORTANT NOTE: You are advised to consult the publisher's version (publisher's PDF) if you wish to cite from it. Please check the document version below. Document Version Publisher's PDF, also known as Version of record Publication date: 2003 Link to publication in University of Groningen/UMCG research database Citation for published version (APA): Le, K. N. (2003). Investment of rice mills in Vietnam: the role of financial market imperfections and uncertainty Groningen: s.n. Copyright Other than for strictly personal use, it is not permitted to download or to forward/distribute the text or part of it without the consent of the author(s) and/or copyright holder(s), unless the work is under an open content license (like Creative Commons). Take-down policy If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. Downloaded from the University of Groningen/UMCG research database (Pure): For technical reasons the number of authors shown on this cover page is limited to 10 maximum. Download date:

2 Investment of Rice Mills in Vietnam The Role of Financial Market Imperfections and Uncertainty Le Khuong Ninh ISBN

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4 Rijksuniversiteit Groningen Investment of Rice Mills in Vietnam The Role of Financial Market Imperfections and Uncertainty Proefschrift ter verkrijging van het doctoraat in de Economische Wetenschappen aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op donderdag 3 juli 2003 om uur door Le Khuong Ninh geboren op 28 september 1965 te Can Tho (Vietnam)

5 Promotor: Co-promotores: Beoordelingscommissie : Prof.dr. F.M. Tempelaar Dr. G.J. Lanjouw Dr. C.L.M. Hermes Prof.dr. L.H. Hoogduin Prof.dr. B.W. Lensink Prof.dr. H. Visser iv

6 Acknowledgements This dissertation is the outcome of my work at the Faculty of Economics of the University of Groningen and the School of Economics and Business Administration of Cantho University in Vietnam, which was part of Project No. 2 within the NUFFIC-MHO cooperation between Cantho University and Dutch institutions of higher education. Many people have been of great help in completing this dissertation. I would like to thank all of them, both in person and in these acknowledgements. Unfortunately, it is not possible to mention all on this page. I am grateful to Professor Frans Tempelaar for giving me invaluable advice on so many issues. My special thanks are devoted to Ger Lanjouw and Niels Hermes, who have been so helpful that I could not have finished this dissertation without their help. Moreover, Ger Lanjouw has done everything possible to make my stay as easy as it could ever be. Niels Hermes has greatly encouraged me, especially when we, together with Ger Lanjouw, were in Lake Tahoe, Nevada, shortly after I started this dissertation. I would also like to thank Professor Robert Lensink for his interest in my work and his very useful comments, and Professors Lex Hoogduin and Hans Visser for reading the manuscript. I like to extend my gratitude to Professor Caspar Schweigman, Reike Tempelaar, Berend Vis and Marjo for their concern and generosity, and to Pieter Boele for his friendship. Many members of the Office for International Relations, especially Madeleine Gardeur-Veltman, Anita Veltmaat, Gonny Lakerveld, Erik Haarbrink and Wiebe Zijlstra, also deserve my special thanks, so does Arthur de Boer of the Center for Development Studies for his help in different occasions, including the layout of this book. I am indebted to Phuong, Thanh, Thanh, Hao and Duy for assisting me in the data collection. I also owe my gratitude to all my friends for love and support. Last, but foremost, I am very grateful to the Lanjouw family, Ger, Leidy, Harm-Jan and Willem, for being so hospitable that I have always felt at home being with them. I would also like to extend my deepest gratitude to my parents for teaching me how to behave in a decent manner and for encouraging me to pursue my education as far as possible and to my siblings for their constant support. All this book is dedicated to them.

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8 Contents Acknowledgements Contents List of tables List of abbreviations PART 1 INTRODUCTION AND BACKGROUND page Chapter 1 Introduction 1.1 Introduction Outline of the dissertation 4 Map 1.1 Vietnam 6 Map 1.2 The Mekong River Delta, Vietnam 7 Chapter 2 Economic reforms in Vietnam 2.1 Introduction An overview of the economic transition in Vietnam Economic reforms in Vietnam in general State-owned enterprises in Vietnam Private enterprises in Vietnam The agricultural economic reforms The collective regime ( ) The output-contracting regime ( ) Market liberalisation (1988-present) External trade liberalisation and developments in exports External trade liberalisation in general and developments in 19 exports The trade regime in the rice sector and developments in rice exports Conclusions 26

9 Chapter 3 The financial system in Vietnam 3.1 Introduction The formal financial system in Vietnam An overview State-owned commercial banks Foreign banks Joint-stock commercial banks Stock market Summary The informal financial sector in Vietnam Moneylenders Rotating savings and credit associations (ROSCAs) Summary Government policy vis-à-vis the financial sector Regulation concerning banking Monetary policy Characterization of the Vietnamese financial system Conclusions 49 Chapter 4 The rice-milling industry in the Mekong River Delta 4.1 Introduction Paddy grain, the rice-milling process, and loss in milling Paddy grain The rice-milling process, loss in milling, and rice-milling techniques The rice-milling technology in the Mekong River Delta in practice A profile of private rice mills in the Mekong River Delta An overview of the emergence of private rice mills in the Mekong River Delta Uncertainty regarding future market developments facing 60 private rice mills 4.5 Conclusions 64 PART 2 LITERATURE REVIEW Chapter 5 Financial market imperfections and investment 5.1 Introduction 67 viii

10 Contents 5.2 Financial market imperfections, asymmetric information, and credit 67 rationing 5.3 Firm investment under financial market imperfections Empirical investment models The standard investment models Internal funds-augmented investment models Summary Empirical evidence Conclusions 85 Appendix 5.1 Summary of the results of empirical studies on firm investment 87 under financial market imperfections - sorting criteria: size Appendix 5.2 Summary of the results of empirical studies on firm investment 88 under financial market imperfections - sorting criteria: age Appendix 5.3 Investment-internal funds sensitivities as an indicator of financial constraints: a criticism 89 Chapter 6 Investment under uncertainty 6.1 Introduction The real options approach to investment A brief overview of the traditional models Background of the real options approach to investment A description of the real options Real options and firm investment Some further considerations Summary Empirical evidence Uncertainty measurement Uncertainty measures and the investment-uncertainty relationship The investment-uncertainty relationship and irreversibility The investment-uncertainty relationship and competition The investment-uncertainty relationship and firm size Conclusions 107 Appendix 6.1 Summary of the results of empirical studies on firm investment 109 under uncertainty Appendix 6.2 Summary of the results of empirical studies on the uncertainty-investment 110 relationship: the role of irreversibility Appendix 6.3 Summary of the results of empirical studies on the uncertainty-investment relationship: the role of competition 111 ix

11 Appendix 6.4 Summary of the results of empirical studies on the uncertainty-investment relationship: the role of firm size 112 PART 3 STATISTICAL DESCRIPTION AND EMPIRICAL STUDY Chapter 7 An overall description of the sample 7.1 Introduction The survey Preparing the questionnaire Sample selection Interviewers Respondents perception bias A statistical description of the sample Age Size Location Sales Profit Borrowing Investment Factors affecting investment decisions of rice millers Conclusions 128 Chapter 8 Financial market imperfections and investment 8.1 Introduction Patterns of investment financing of private rice millers in the Mekong 130 River Delta 8.3 Financial market imperfections and investment: model specification Results and discussions Entire sample Applicants Size Age Conclusions 145 x

12 Chapter 9 Uncertainty and investment Contents 9.1 Introduction An overview of the empirical study and the data set Measuring uncertainty Coefficient of variation of the expected sales (CEV) Another uncertainty variable: DEVAS Measuring irreversibility Causes of irreversibility for private rice mills Possibility to resell used rice-milling machinery Resale price of used rice-milling machinery Proxy for irreversibility of used rice-milling machinery Results and discussions Entire sample High uncertainty versus low uncertainty High irreversibility versus low irreversibility Competition Large rice mills versus small rice mills Conclusions 165 Appendix 9.1 Calculation of uncertainty variables 167 Appendix 9.2 Robustness of the irreversibility proxies 170 PART 4 CONCLUSIONS AND RECOMMENDATIONS Chapter 10 Conclusions, recommendations and further research 10.1 Introduction Conclusions Financial market imperfections and investment of private 173 rice millers Uncertainty and investment of private rice millers Recommendations Improving access of private rice millers to credit Reducing uncertainty and irreversibility Suggestions for further research 177 REFERENCES 179 QUESTIONNAIRE 191 SAMENVATTING 201 xi

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14 List of tables page Table 1.1 Vietnam: investment share by ownership, Table 1.2 The Mekong River Delta, Vietnam 4 Table 2.1 Vietnam: some economic indicators, Table 2.2 Vietnam: shares of the state-owned and non-state sectors in 14 GDP, Table 2.3 Vietnam: rice production, Table 2.4 Vietnam: export revenue and growth, Table 2.5 Vietnam: rice exports, Table 3.1 Vietnam: some financial indicators, Table 3.2 Vietnam: sources of formal credit, Table 3.3 Vietnam: distribution of bank credit, Table 3.4 Vietnam: lending interest rates, Table 3.5 Vietnam: reserve requirement ratios 46 Table 3.6 Vietnam: financial deepening 47 Table 3.7 Gross domestic savings by country, Table 4.1 Vietnam: shares of state-owned and private rice mills in the 60 rice-milling industry, Table 6.1 Subjective probability distribution (SPD) 100 Table 7.1 A statistical description of the sample 118 Table 7.2 Actual borrowing of private rice mills 124 Table 7.3 Past investments of private rice mills in 1998 and Table 7.4 Planned investments for 2000 and Table 7.5 Importance of factors affecting investment decisions of private 127 rice millers Table 8.1 Patterns of investment financing of private rice millers, Table 8.2 Descriptive statistics of variables: entire sample 133 Table 8.3 Determinants of investment of rice millers: entire sample 134 Table 8.4 Descriptive statistics of variables: applicants 135 Table 8.5 Determinants of investment of the applicants 136 Table 8.6 Descriptive statistics of variables: large and small rice mills 138 Table 8.7 Determinants of investment: large versus small rice mills entire sample 139

15 Table 8.8 Determinants of investment: large versus small rice mills 140 applicants Table 8.9 Determinants of investment of rice mills: size 142 Table 8.10 Descriptive statistics of variables: old and young rice mills 143 Table 8.11 Determinants of investment: young versus old rice mills 144 Table 9.1 Frequency distribution of the expected growth rate of sales 149 Table 9.2 Frequency distribution of the coefficient of variation of the 150 expected sales (CEV) Table 9.3 Frequency distribution of the possibility to resell used ricemilling 152 machinery and the resale price Table 9.4 Descriptive statistics of variables: entire sample 156 Table 9.5 Uncertainty and investment of rice millers 157 Table 9.6 Descriptive statistics of variables: high and low uncertainty 159 Table 9.7 Investment-uncertainty relationship and degree of uncertainty 159 Table 9.8 Investment-uncertainty relationship and irreversibility 161 Table 9.9 Descriptive statistics of variables: high and low competition 162 Table 9.10 Investment-uncertainty relationship and competition 163 Table 9.11 Descriptive statistics of variables: large and small rice mills 164 Table 9.12 Investment-uncertainty relationship and firm size 165 Table 9.13 Uncertainty and investment of rice mills 170 xiv

16 List of abbreviations ADB AFTA ASEAN CMEA DRV ERP EU FDI GATT GDP HCMC IMF JSB MRD NPV OECD QR RM ROSCA SBV SME SOE SOFC SPD US USD VND WAAC WTO Asian Development Bank ASEAN Free Trade Area Association of South East Asian Nations Council of Mutual Economic Assistance Democratic Republic of Vietnam Effective Rate of Protection European Union Foreign Direct Investment General Agreement on Tariffs and Trade Gross Domestic Products Ho Chi Minh City International Monetary Fund Joint-Stock Commercial Bank Mekong River Delta Net Present Value Organisation for Economic Cooperation and Development Quantitative Restriction Rice Mill Rotating Savings and Credit Association State Bank of Vietnam Small- and Medium-Sized Enterprise State-Owned Enterprise State-Owned Food Company Subjective Probability Distribution United States US Dollar Vietnam Dong Weighted Average Cost of Capital World Trade Organisation

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