Impact of Applying Human Resource Management Practices on Equitized State-Owned Enterprises' Financial Performance in Vietnam

Article excerpt

INTRODUCTION

Vietnam started a profound economic reform in 1986 that aimed to transform the country from a command economy into market oriented economy. From the early days of the economic reform, economic structure reforms and open-door policies have become an integral part of overall economics (World Bank, 1999). As a consequence, Vietnam has substantially elevated its economy and the living standards of Vietnamese people. The country reaped average economic growth rate (GDP) of over 7% during the 1990s and early 2000s, especially more than 8% in 2006, which made it one of the highest growing economies in the World (World Bank, 2006).

These reforms have been occurring in both the public and private sector. In the public sector, one of the most important aims of the State has been to restructure the state-owned enterprises (SOEs) through equitization (privatization) process. This process was initiated in 1992 with the statement of sales of SOEs to the public (Quang & Dung, 1998). This effort can be regarded as one that would convert un-profitable SOEs into more dynamic, fast growing private enterprises, injected with a stronger entrepreneurial spirit (Henrik, 2005).

It is worth noting that Vietnam had about 12,000 SOEs at the outset of its economic reforms; however, financial performance of these SOEs lagged since they lacked incentives to be more efficient and profitable (Vu, 2004). In addition, they utilized a disproportionate level of the country's limited resources, holding approximately 75% of the country's assets, employing 30% of the labor force, and earning 85% of available bank credit; yet, contributing only 40% to the country's GDP (Nguyen, 1995).

The reasons for un-profitability and inefficiency of SOEs are innumerable, but mainly from SOEs management mechanism. This kind of mechanism, largely influenced by the subsidy system, did not motivate managers to be more responsible and open minded as actually practiced in a market economy. Specifically, there was no impetus to utilize business management methods, such as marketing, financial, or human resource management, to improve enterprise financial performance, because managers were not seriously appraised by enterprise results, and employees were not motivated to conduct their work well.

The equitization program has been successful in transforming a significant number of SOEs into equitized SOEs (ESOEs), and the Vietnamese government hopes that these ESOEs will operate their business activities under market conditions, and perform better than their former SOEs. It has been argued that what makes an enterprise effective is not only its financial resource, which ESOEs in Vietnam can manage to have but also important intangible assets such as human resource (Quang & Dung, 1998). Indeed, evidence has shown that economic development is positively related to investment in human capital (Torrington & Huat, 1994). Thus, ESOEs have recently begun to apply HRM practices, ubiquitous in the developed countries, in order to improve their financial performance. This study focuses on theoretically analyzing the effects of certain human resource management practices applied by ESOEs, such as human resource planning, compensation, training, performance appraisal, and recruitment and selection, on enterprise financial performance. More specifically, the objectives of this study are two-fold:

To examine how well are certain human resource management practices applied into ESOEs; and

What effects, if any, do these human resource management practices have on ESOEs financial performance?

BACKGROUND

Equitization is viewed as one of the primary approaches to reforming SOEs in Vietnam. Equitization can be conducted based on the following four forms (MPDF, 1999): (1) retaining state shares intact while selling new shares; (2) selling a given proportion of the existent state shares; (3) detaching and then selling parts of an SOE; and (4) selling off all state shares to workers and private shareholders. …