Business environment and labor productivity: The case of the Vietnamese firms

aVinh University, Nghe An, Vietnam bFaculty of Political Economy, School of Political and Administrative Sciences, Ho Chi Minh City, Vietnam cSchool of Political and Administrative Sciences, Viet Nam National University Ho Chi Minh City, Vietnam dUniversity of Finance – Marketing, Ho Chi Minh City, Vietnam eCollege of Foreign Economic Relations, Ho Chi Minh City, Vietnam fAn Tinh Ward, Trang Bang District, Tay Ninh Province, Vietnam gBinh Chanh District, Ho Chi Minh City, Vietnam C H R O N I C L E A B S T R A C T


Introduction
Labor productivity of manufacturing firms is a key driver of economic growth, and national welfare (Acemoglu & Zilibotti 2001;Diewert, 2014;El-hadj & Brada, 2009;Barro & Sala-i-Martin, 1995). While the manufacturing firms play an important role in Vietnam , little is yet known about its labor productivity. On top of that, there is a large literature documenting determinants of labor productivity. However, it is not clear how the business environment (ease for business) contributes to the labor productivity of manufacturing firms. This knowledge gap in the manufacturing sector's labor productivity presents a serious space in the development of manufacturing firms in Vietnam. The current paper, thus, aims to explore the effects of the business environment (ease for business) on the labor productivity of manufacturing firms, using a combination of two national-wide firm-level and provincial-level dataset in 2010-2018, namely the Vietnam Annual Enterprise Census (VAES) and the Provincial Competitiveness Index (PCI). 112 The paper is structured as follows. In section 2 we review related literature on the effect of business environment on labor productivity. In section 3 we describe the dataset and methods. In section 4 we present empirical results. The final section summarizes the findings and discusses policy implications and future research.
The business environment can be seen as a deep determinant of labor productivity. Deep determinants are those which are deeper forces behind common determinants suggested by theoretical literature. North (1994) argued that institutional regulations can stimulate productivity because it reduces transaction costs for firms. Isaksson (2007) points out that institutions are one of the drivers of productivity growth because capital formation and increased resource allocation are only effective within the framework of good institutions. Dixit (2009) states that the practice of law is more important than the enactment of the law for economic growth.
Among empirical studies, Francois and Manchin (2007) have shown evidence of governance quality for the export level, while McCulloch et al. (2013) attempted to seek the role of district public administration of Indonesia in per capita income in the locality. However, McCulloch et al. (2013) do not find strong evidence. Labor productivity enhancement according to economic governance was surveyed by Djankov et al. (2006) with the focus on how business-facilitating regulations reduce business costs. The combination of the productivity of the Indian manufacturing industry and economic reform (licensing) was investigated by Ghosh (2013).
In short, there is a large literature documenting determinants of labor productivity. However, it is not clear how the business environment (ease for business) contributes to the labor productivity of manufacturing firms. This knowledge gap in the manufacturing sector's labor productivity presents a serious space in the development of manufacturing firms in Vietnam.

Data
The first set of data in this paper comes from the firm-level survey for the period 2010-2018, which is collected by the General Statistical Office of Vietnam in the Vietnam Annual Enterprise Census (VAES). The survey collects various firm-level production information such as output, sales, labor, employees, capital, and materials. Many empirical studies employ this dataset, so far, including Ngo et al. (2020), Ngo and Tran (2020) and Ngo and Nguyen (2019). The second data source is from a survey of the Provincial Competitiveness Index (PCI), which were conducted by the Vietnam Competitiveness Initiative in collaboration with the Vietnam Chamber of Commerce and Industry in the same period with the VAES. The survey provides nine institutional sub-indices: First, entry costs including (i) time for firm registration and land acquisition, (ii) time for firms to gain all the necessary licenses needed to start a business as well as the degree of difficulty to obtain such licenses/permits. Second, access to the acquired land and the security of business premises after the land has had been acquired. Third, transparency and access to information, that is whether firms have access to proper planning and legal documents for running their business such as labor and training, whether new policies and laws are communicated to firms sufficiently and predictably implemented. Fourth, the cost of time to deal with regulatory compliance measure e.g. bureaucratic compliance or decisions to implement local regulations. Fifth, informal charges measuring a firm's perception of the corruption from provincial officials. Sixth, distortion offering privileges to state-owned enterprises e.g. incentives, policy, and access to capital and credit sources toward state-owned enterprises. Seventh, private sector development designs services, provinces' private sector business growth promotion programs, development of industrial zones and parks. Eighth, employment and worker training, those provincial authorities promote vocational training and skills development for local firms. Ninth, legal institutions measuring the trust from firms on provincial courts and contract enforcement. The combination of the VAES survey and PCI survey results in a multilevel panel dataset and enables us to assess the effects of easy to the business at the provincial level on the labor productivity of manufacturing firms.

Methods
Eq. (1) examines the effect of easy for business on labor productivity.
where i and t indicate firm i and at time t, respectively. Labor productivity is measured as a ratio of firm-level value-added per working labor. Details are in . is the error term. Z is a vector of firm-level controlling variables (including: physical capital intensity, human capital intensity, and firm size either by capital stocks or the number of laborers). PCI is the Provincial Competitiveness Index. Table 1 provides the mean value of labor productivity and several of its potential determinants for labor productivity. The mean level of labor productivity equals VND 6236.28 million in 2010 and VND 2845.33in 2018. Relates to firm-size as measured by the log of the number of workers at the firm at the end of the last fiscal year, firms in 2018 show to have lover level of employment as compared to firms in 2010. With respect to the age of the firm, there is not much difference of the firms in 2010 and 2016 since the dataset is panel. Regarding the total capital stock, there is a decrease in the total fixed assets (in logs) of the firms from 2010 to 2018. An important aspect in the sample related to firms with foreign direct investment shows that the number of FDI firms in 2016 is higher than that in 2010. Other important aspect in the sample related to firms with export activities shows that the number of exporting firms in 2016 is higher than that in 2010. We do not have the information of FDI firms and exporting firms in 2017-2018.  Table 2 provides the mean value of Provincial Competitiveness Index and nine sub-indices of PCI. Overall, nine dimensions of CPI have been improved over the period 2010-2018. However, transparency and access to information (Sub-index 3), support for private sector development (Sub-index 7), employment and worker training (Sub-index 8) have not observed much changes in the sample period.

Source: Authors' calculation from VAES 2010-2018
We explore the determinants of labor productivity in annual samples of all firms with a focus on PCI (Table 3) and its components (Tables 4). First of all, we discuss shortly traditional determinants of labor productivity. About the firm size in terms of employment, our results support the view that there exist a diminishing labor productivity with firm-size (Acs & Audretsch, 1988;Cohen & Klepper, 1996;Diaz & Sánchez, 2008;Pagano & Schivardi, 2003;Söderbom & Teal, 2004;Van Biesebroeck, 2005). Secondly, about the age of the firm, we find the reverse effect of firm age on productivity. The evidence proves the vintage effect due to younger firms who employing new and improved technology or equipment, and inefficient firms with ages implying lower productivity for the surviving older firms (Bahk & Gort, 1993;Jensen et al., 2001;Jovanovic, 1982). In relation to the role of physical capital in determining labor productivity, regressions in Table 3 show that physical capital has a positive relationship with labor productivity and it is significant at 1 percent level. The outward orientation of the firm as captured by exports and FDI ownership has a positive association with labor productivity. All two variables are significant at 1 percent level in the fullyear sample. These results support the empirical findings of Griffith and Simpson (2004) who find a positive effect of export and foreign ownership on labor productivity, respectively. Our most interesting variable is PCI. The empirical results in Table  3 show that the business environment has a positive relationship to the labor productivity. Evidence for this positive relationship is found in all-year samples. This implies that the influential high quality of the business environment makes investors feel encouraged to invest in productivity improvement projects. The result is consistent with findings from Nguyen (2017). Table 4 further present the effects of PCI components on labor productivity. In general, most of PCI components are significant at 1 percent level, except for (1) the cost of time to deal with regulatory compliance measure, and (2) informal charges. Firstly, components "entry cost" and "distortion offering privileges to state-owned enterprises" have significantly negative effects on labor productivity. Secondly, more access to the acquired land and the security of land, transparency and access to information, support for private sector development, employment and worker training, legal institutions gives raise of labor productivity.

Conclusions
While the manufacturing firms play a crucial role in Vietnamese economy, little is yet known about its labor productivity, especially the effects of easy for business in the context of institutional transition to the market economy. By combining two national-wide firm-level and provincial-level dataset in 2010-2018, namely the Vietnam Annual Enterprise Census (VAES) and the Provincial Competitiveness Index (PCI), the current paper, thus, aimed to explore the effects of the business environment (ease for business) on the labor productivity of manufacturing firms. Empirical results have shown that the labor productivity of the manufacturing sectors is associated with traditional determinants of labor productivity such as firm size, the age of the firm, physical capital, the outward orientation of the firm as captured by exports and FDI ownership. In addition, importance of ease to business is also found both at the aggregate and disaggregate levels during the study period. The results support the arguments that Vietnam's government policy in building a good business environment plays a crucial role in stimulating the economic growth, especially in terms of a broaden base for the economic development. Empirical studies about the in-depth effects of institutional changes on the labor productivity in the manufacturing industries will be fruitful research agenda.