Academic journal article Journal of Southeast Asian Economies

Capital Structure in Small and Medium-Sized Enterprises: The Case of Vietnam

Academic journal article Journal of Southeast Asian Economies

Capital Structure in Small and Medium-Sized Enterprises: The Case of Vietnam

Article excerpt

I. Introduction

Vietnam has been changing to a market-oriented economy over the past eighteen years, and there is growing recognition of SMEs' importance in the transitional economy. Consequently, the Government has introduced numerous policies in order to support this important business sector. According to recent statistics, 96 per cent of registered firms are classified as small and medium-sized firms, of which private SMEs account for nearly 82 per cent. The small business sector in Vietnam also generates 25 per cent of annual GDP. However, SMEs still face the difficult issue of access to capital for future development (Doanh and Pentley 1999). This raises a question as to what factors influence the capital structure of Vietnamese SMEs--an important concern in improving financial policies to support the small business sector.

There are only a limited number of studies on factors influencing capital structure among Vietnamese firms. Some of these studies just focused on an industry (San 2002) or listed firms on the Ho Chi Minh City stock market (Vu 2003). The financial sector in Vietnam is characterized by a bank-based system, where state-owned commercial banks (SOCBs) play an important role, with limited sources of long-term finance (ADB 2002). In a study of the banking sector in Vietnam, Soo (1999) reported that SOCBs provide 78 per cent of total loans in the economy, and half of SOCBs' credits are channelled into state-owned enterprises (SOEs). Thus, a fragile banking sector makes it more difficult for SMEs, especially private ones, to access bank loans.

As for similar studies in other countries, most empirical evidence on capital structure tends to focus on large firms in developed countries (Marsh 1982; Titman and Wessels 1988; Bennet and Donnelly 1993; Bevan and Danbolt 2000). Only in recent years have a few studies examined these issues either in developing countries or among small firms (Hamilton and Fox 1998; Booth et al. 2001; Michaelas, Chittenden, and Pitziouris 1999; Graham, Hutchison, and Michaelas 2000; Mira 2001; Bhaduri 2002). A review of empirical studies on the capital structure of SMEs helped us to identify some key issues. Not all determinants are consistent with those predictions advanced by theories of finance. Indeed, there are some contrary results on the relationship between some determinants and capital structure among firms in some countries (Michaelas 1999; Mira 2001, Heshmati 2001). In addition, the firm characteristics are often at the centre in most empirical studies, while the effects of managers' behaviour have seldom been examined. In a qualitative piece of research, Michaelas, Chittenden, and Pitziouris (1998) argued that owners' behaviour, in conjunction with internal and external factors, will determine capital structure decisions. This requires further quantitative studies to examine what factors influence capital structure in the small business sector in developing countries.

Based on such gaps in the existing literature, this paper attempts to study features of the capital structure of Vietnamese SMEs, over the period 1998-2001, and examine the influence of specific determinants on SMEs' capital structure. This study has combined data from financial statements and questionnaires given to SMEs' financial managers to explore how Vietnamese SMEs finance their operations. The study examines such determinants as growth, tangibility, business risk, profitability, size, ownership, relationship with banks, and networking on three measures of capital structure.

The remaining sections of this paper are organized as follows: Section II presents an overview of the literature on capital structure and develops testable hypotheses. Section III describes the methodology and measurement of variables. Section IV reports and discusses the results. Section V summarizes the findings of this study.

II. Literature Review and Hypotheses

Capital structure is defined as the relative amount of debt and equity used to finance a firm. …

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