1. Understanding Firm-level Corruption in Vietnam By John Rand May 2009 Web: www.econ.ku.dk/rand Email: john.rand@econ.ku.dk www.econ.ku.dk/randjohn.rand@econ.ku.dk

2. 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$)

3. 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.

4. 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)

5. 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

6. 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

7. Number of Interviewed Firms Interviewed in 2007 (only non-state manufacturing) Interviewed in 2005 Ha Noi296279278 Phu Tho255242265 Ha Tay394381382 Hai Phong206194191 Nghe An359349376 Quang Nam173154 Khanh Hoa928695 Lam Dong898179 HCMC633602665 Long An138124118 Total2,6352,4922,603

8. Province and Legal Ownership Form (2007) Household enterprises Private/ sole Proprietorship Partnership/ Collective/ Cooperative Limited liability company Joint stock companyTotal Ha Noi119261910213279 Phu Tho22244102242 Ha Tay3121410432381 Hai Phong922535339194 Nghe An288226285349 Quang Nam1307692154 Khanh Hoa5614112386 Lam Dong65808081 HCMC35250171767602 Long An9621160124 Sample total1,73219199427432,492

9. 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.

10. Bribe Incidence: Transition Matrix Year 2007 NoYesTotal Year 2005 No 892(85)156(15)1,048 (70)(40)(63) Yes 383(62)230(38)613 (30)(60)(37) Total1,275(77)386(23)1,661 Note: Number of enterprises percentage in parenthesis) ”Bribe Switchers”

11. Bribe Purpose Identification

12. Bribe size Bribe amountPct of bribes paid Obs.(Pct. of total revenues)by medium/large firms To get connected to public services2980.3010 To get licenses and permits430.567 To deal with tax and tax collectors2130.7410 To gain government contracts1551.0915 To deal with customs230.3361 Other reasons2660.380 Total9980.5513 Increase from 0.5 to 0.6 between 2005 and 2007

13. 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.

14. Summary Statistics Total20052007 MeanSDMeanSDMeanSD Firm size14.85333.23615.53332.48014.17333.972 Micro0.6890.4630.6770.4680.7010.458 Small0.2560.4370.2670.4420.2460.431 Medium0.0520.2220.0550.2280.0490.215 Large0.0030.0550.0020.0420.0040.065 KL ratio (log)4.1931.2214.0651.2054.3211.224 Profit per employee (log)2.3100.8662.1820.8422.4370.870 State customer0.1440.3520.1440.3520.1440.352 State supplier0.0760.2640.0750.2640.0760.265 Trade0.0580.2330.0610.2400.0540.226 Government assistance0.2690.4440.2950.4560.2440.430 Inspections0.5020.5000.4480.4970.5560.497 Not registered0.2830.4500.2610.4390.3040.460 130 mill. VND 15 mill. VND

15. Traditional Determinants OLS (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 includedNo Sector dummies includedNo Province dummies includedNo No of observations3,322 1,6613,322

16. Interaction with Public Officials IndividualCombinedFE Estimates State as customer0.066***0.0390.038 (2.58)(1.60)(1.21) State as input supplier0.165***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 assistance0.050**0.038*0.052** (2.51)(1.92)(2.27) Inspected0.138***0.103***0.031 (7.23)(5.31)(1.30) Not registered-0.201***-0.169***-0.086** (8.70)(7.01)(2.34) ???

17. Firm Growth and Bribes 1356 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 change0.214***-0.171*** (2.89)(2.60) Legal structure dummies includedYes Sector dummies includedYes Province dummies includedYes Observations1661 1048613 R-squared0.08 0.100.14 No ”Efficient Grease” – But performance punishment. (Effect only possible to identify with panel data)

18. Interaction Indicators and Growth 123 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 change0.100* (From no assistance to assistance)(1.68) Not registered change0.347*** (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.)

19. 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.