An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets 981991504X, 9789819915040

Table of contents :
Preface
Acknowledgements
Contents
About the Authors
Abbreviations
Technical Terms
List of Figures
List of Tables
1 Introduction
1.1 Introduction
1.2 Motivation of the Research
1.3 Research Objectives, Scope, and Methodology
1.3.1 Research Objectives
1.3.2 Research Scope and Methodology
1.4 Significance and Contribution
1.5 Overview of Chapters
References
2 Role of Vietnam in a Changing Global Economy
2.1 Introduction
2.2 Vietnam as an Emerging Market
2.2.1 Economic Background
2.2.2 State-Owned Enterprise Reform
2.2.3 Private Enterprise Development
2.2.4 Foreign Investment Flow
2.2.5 Development of the Vietnam Stock Market
2.2.6 GDP Growth
2.2.7 Role of Sovereign Wealth Funds
2.3 Vietnam as a Global Economic Player
2.3.1 SOEs and International Business
2.3.2 Global Supply Chains
2.3.3 Trade Policies
2.3.4 SOEs and Global Supply Chain Governance
2.3.5 Transformation into the Digital Economy
2.4 Summary
References
3 Literature on Corporate Governance and Ownership Structure
3.1 Introduction
3.2 Theoretical Perspectives on Corporate Governance
3.2.1 The Concepts and Theories of Corporate Governance
3.2.2 Emergence of the Concepts of Corporate Governance
3.2.3 Corporate Governance Mechanisms: Solutions to Agency Problem
3.3 Theoretical Perspective on Board of Directors
3.3.1 The Concept of Board of Directors
3.3.2 Approach to Studies of Board of Directors
3.3.3 Empirical Studies on the Relationship Between Board Characteristics and Firm Performance
3.3.4 Theoretical Perspective on Chairman Characteristics
3.4 Theoretical Perspective on Ownership Structure
3.4.1 Ownership Concentration
3.4.2 Insider Ownership
3.4.3 Owner Identity
3.4.4 State Ownership
3.5 Studies of Board of Directors, Ownership and Chairman Attributes in Vietnam
3.6 Summary
References
4 Vietnam’s Corporate Governance, Regulatory and Institutional Settings
4.1 Introduction
4.2 The Concept of Corporate Governance and Key Features of the Corporate Sector in Vietnam
4.3 Legal and Regulatory Framework and Best Practices of Corporate Governance
4.3.1 The Law on Enterprise 2005 and Its Amendments: The Most Fundamental Corporate Governance Regulation
4.3.2 Listing Rules by Securities Regulators, Accounting, and Auditing Standards
4.3.3 Codes of Corporate Governance
4.3.4 Manual of Corporate Governance
4.4 The General Governance of Structure of a Shareholding Company
4.5 Preliminary Evaluation of the Corporate Governance System in Vietnam
4.6 Ownership Structure of the Listed Companies in Vietnam
4.7 Summary
References
5 The Effect of Board of Directors, Chairman, and Ownership Attributes on the Agency Cost: Empirical Evidence
5.1 Introduction
5.2 Research Question and Hypothesis Development
5.2.1 Hypothesis for Board of Directors
5.2.2 Hypothesis Development for Chairman Attributes
5.2.3 Hypothesis Development for Ownership Attributes
5.3 Research Methodology and Variable Description
5.3.1 Descriptive Analysis and Univariate Testing
5.3.2 Panel Data
5.3.3 Variable Measurement
5.4 Sample Selection and Data Source
5.4.1 Sample Selection
5.4.2 Data Source
5.5 Empirical Evidence
5.5.1 Univariate Analysis: Descriptive Statistics
5.5.2 Bivariate Analysis
5.5.3 Multivariate Analysis
5.6 Endogeneity and Further Robustness Check
5.6.1 The GMM Estimator
5.6.2 The DID Estimation
5.7 Summary
References
6 Government in Business: An Analysis of the State Capital Investment Corporation
6.1 Introduction
6.2 Research Questions, Hypothesis Development and Methodology
6.2.1 Research Questions and Hypothesis Development
6.2.2 Research Methodology
6.3 Sample Selection, Data Source and Descriptive Statistics
6.3.1 Sample Selection and Data Source
6.3.2 Univariate Analysis: Descriptive Statistics
6.4 Empirical Results
6.4.1 Empirical Result for Abnormal Returns to Shareholders—Univariate Analysis
6.4.2 SCIC Ownership and Shareholder Returns—Multiple Regression Analysis
6.5 Endogeneity and Further Robustness Check
6.5.1 Endogeneity and Robustness Check for the Relation Between SCIC Ownership and Stock Returns.
6.5.2 Robustness Check for the Relation Between Stock Returns for Buy, Sell and Appointment Announcements in the Two Ownership Classifications
6.6 Conclusion
References
7 Ownership and Governance: Implications for Policymakers and Practitioners Doing Business in Vietnam
7.1 Introduction
7.2 Outlook of Vietnam and Challenges Ahead
7.2.1 Economic Development Goals
7.2.2 Challenges Ahead
7.3 Analysis of the Results of Our Research and Their Implications
7.3.1 Effect of Appointment of Foreigners to the Supervisory Board on Agency Cost Reduction
7.3.2 Effect on Presence of Multiple Representatives on Board of Directors, Non-Executive Directors, and Independent Directors on Agency Cost Reduction
7.3.3 Positive Impact of Largest Shareholder Ownership on Reducing Agency Cost
7.3.4 Negative Link Between Second Large Shareholder’s Ownership and Agency Cost Reduction
7.3.5 Findings on the SCIC
7.3.6 Chairman’s Employment Tenure and Title
7.3.7 No Statistical Evidence of Impact of Foreign Ownership on Agency Costs
7.4 Suggestions
7.4.1 Suggestions for Policymakers and Regulatory Bodies in Vietnam
7.4.2 Suggestions for Practitioners
7.5 Summary
References
8 An Effective Business Model and Concluding Thoughts
8.1 Introduction
8.2 Summary of Results, Effective Model, and Nexus Between Governance Drawback Mitigation and Our Findings
8.2.1 Summary of Results, Proposed Effective Model and Governance Drawback Mitigation
8.2.2 Nexus Between Governance Mechanism Drawback Mitigation and Findings from Our Study
8.2.3 Future Consideration for Governance Issues in Vietnam
8.3 Limitations of the Study
8.4 Suggestions for Further Research
8.5 Closing Thoughts
References
Appendices
Appendix 1: Legal and Regulatory Framework for Corporate Governance in Vietnam
Appendix 2: Difference in Rights According to the Shareholding (Extraction from the Enterprise Law 2020)
Appendix 3: Key Updates on Disclosure and Corporate Social Responsibility/ESG
Appendix 4: Initial Transfer of Large Vietnamese SOEs to the Commission for the Management of State Capital at Enterprises in 2018
Appendix 5: Summary of Studies on the Relationship Between Ownership and Firm Performance
Appendix 6: The Results of the Hausman Test
Appendix 7: The Result of Falsification Testing Under the DID Estimation

Citation preview

Giang Hoang Kok Boon Oh

An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets

An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets “An insightful and carefully designed book incorporating major theoretical frameworks, market practices, and regulatory implications all are essential to have a thorough understanding of the corporate governance landscape in emerging markets. The beauty of this book is that it sheds light on the unique agency problem that an economy driven by State-Owned Enterprises (SOEs) could face due to the socio-economic environment where the presence of state representatives and foreigners plays an important role in the evolving dynamics of corporate governance. As a market practitioner with experience in emerging markets, it is my privilege to introduce this book to those who seek guidance for corporate governance in emerging markets or wish to engage with emerging markets for business purposes.” —Mr. Hwun Choi, CFA, Yale University’s Graduate, Vice President of Global Strategy, Korean Exchange, South Korea “As someone with an extensive professional engagement with Asia, particularly Vietnam, in the past three decades this is a timely book. This book addresses issues related to corporate governance and institutional transformation in Vietnam from the challenges of its role as a global economic player. It highlights the need for the public and private sectors to harden their resolve for greater transparency and accountability.” —Professor John Study, Deputy Chair of the Board of Directors/CEO of Texila College, Australia “This book is a terrific guide for anyone wanting to gain a comprehensive understanding of the Vietnam corporate governance system and governance of state-owned enterprises (SOEs). It provides a new evidence-based framework that captures the uniqueness of multiple-agent agency problems in Vietnam’s corporate landscape, characterised by mixed and concentrated ownership. It also highlights the effectiveness of the State Capital Investment Corporation, one of the most significant initiatives in the SOEs reform by the Government of Vietnam. While the book can be primarily viewed as academic research with various model-based techniques conducted on a comprehensive dataset from the Vietnam Exchange, it also adopts a pragmatic approach to offer practical models for corporate practitioners, investors, and policymakers to navigate the heterogeneity of corporate governance issues in emerging markets. This is an imperative guide for those planning to or are engaged in the emerging market business.” —Mr. Phi-Hung Nguyen, CEO of PG Bank Vietnam “This book is a comprehensive reference book for researchers and practitioners who are looking for empirical and theoretical insights on corporate governance of state-owned enterprises (SOEs), especially those with mixed ownership of state capital and private capital. Despite corporate governance’s theoretical and practical importance, the literature examining this topic remains scant, with particular reference to Vietnam. The book contributes to the scant literature on it. It also contributes to the ongoing debate in the literature to identify the most appropriate theoretical and practical frameworks to explain the intricacies of corporate governance of state ownership in emerging markets, with particular reference to Vietnam. This is an indispensable guide for those planning to or are engaged in the emerging market business.” —Professor Enzo Scannella, Professor of Banking and Finance, University of Palermo (Italy), Editor in Chief of International Journal of Financial Innovation in Banking

Giang Hoang · Kok Boon Oh

An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets

Giang Hoang Monash Business School Monash University Melbourne, VIC, Australia

Kok Boon Oh eGalaxy Solutions Melbourne, VIC, Australia

ISBN 978-981-99-1504-0 ISBN 978-981-99-1505-7 (eBook) https://doi.org/10.1007/978-981-99-1505-7 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

To my family and MM. Giang Hoang Gratitude to my family, colleagues, and students for their valuable contribution to this book. Kok Boon Oh

Preface

Nor shall this peace sleep with her; but as when the bird of wonder dies, the maiden phoenix, Her ashes new create another heir As great in admiration as herself. (William Shakespeare)

The phoenix symbolism, which has been long described in mythology, arts, and culture, represents rebirth or resurrection. As Shakespeare beautifully put it, a phoenix must first burn to rise from her ashes. Even though we know all comparisons are odious, as the saying goes, we love to liken the symbolic image of Vietnam to a phoenix because of its prolonged transformation from darkness to light. The country has remarkably gone through its historical wars and poverty to emerge as a creature of wonder, which the World Bank (WB) usually describes as a “story of success.” At the heart of this success story of Vietnam is the Doi Moi reform in 1986, through which the country has transformed from an economy with only wholly owned enterprises and collectively owned enterprises to that of various players such as equitised firms represented by different state authorities, private firms, household-based businesses, and firms with foreign investment, etc. With the heterogeneity of agents in the economy undoubtedly comes complexity, and with complexity usually comes control and governance. In search of the knowledge of governance issues in the Vietnam institutional setting, it comes to our awareness that while there is a growing body of literature on governance and governance mechanisms in various countries, more research needs to be conducted in this context. This motivates us to explore the agency-based conflicts in Vietnamese enterprises, especially in state-linked firms. A quick glimpse shows that not only do potential conflicts exist in the relationship between managers and shareholders as in dispersed ownership structures, between controlling shareholders and minority shareholders in the case of concentrated ownership structures, between state shareholders and non-state shareholders, but also emerge between local and foreign shareholders and between various representatives of state owners. Thus, our

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book aims to investigate the complexity of unique agency problems arising among multiple agents in Vietnamese enterprises, especially among various state shareholders. We started our analysis by reviewing Vietnam’s institutional setting, the country’s economic development, its role as a global player, and the current corporate governance system. We then conducted an empirical study of corporate governance attributes focusing on the state-linked firms by examining the link between the board of directors and ownership attributes and agency cost levels. Since the central theme of the book lies in explaining the role of the State in Vietnam as a corporate participant with its socialist ideology and the market imperative as an investor, policymaker, and regulator, and how it navigates the corporate governance challenges to maintain market equilibrium, we also evaluated the effectiveness of the State Capital Investment Corporation which serves the role of a facilitator of the country’s equitisation and as a sovereign wealth fund. Using several econometric techniques, we found empirical evidence to support the effectiveness of various state representatives on boards of directors and the positive role of the SCIC when state ownership is not exceeding 50% in firms. It implies that residual state ownership’s impact on firms and state-authorised individuals’ involvement on boards of directors are not necessarily inefficient as commonly perceived. However, there should be a certain extent of monitoring, and the ownership should stay within a certain threshold; otherwise, it will be detrimental to the firm value. Much has been going on with the institutional reform in Vietnam focused on cutting red tape and reforming state-owned enterprises since our model-based analysis in 2015. Therefore, our book also updates these dynamics. For instance, one of the turning points was the year 2018 when the representation of state ownership in nineteen state-owned conglomerates was transferred from the line ministries to a “super commission” called the Commission for the Management of State Capital at Enterprises (CMSC). While we all wait for time to tell its effectiveness, we embrace a view that the initiative is an important milestone in the SOEs reform and believe the findings of our study provide insights and guidance for policymakers in improving the design and implementation of corporate governance guidelines and exerting necessary monitoring. In another instance, while the state-owned sector of Vietnam failed to become the nation’s iron fist due to its inefficiency, the silver lining appeared to come from the private sector and the digital economy. As a result, we undertake a preliminary analysis of governance-related features of this sector and offer our suggested ideas. All in all, our book enhances the understanding of the internal governance mechanisms of an Asian communist country. It adds to the extant literature by examining the effect of attributes peculiar to the Vietnamese context on agency costs. Melbourne, Australia

Giang Hoang Kok Boon Oh

Acknowledgements

Writing a book about the story of a country that soared from one of the poorest countries to a middle-income economy in the world in three decades is a surreal process and is more rewarding than we could have ever imagined. None of this would have been possible without kind supporters whom we have been fortunate to work with and learn from during countless years of experience working in both emerging and developed countries. We are thankful to them all. We greatly appreciate the collaborative efforts made by all supporters during our research process and valuable suggestions from the book reviewers. We are also grateful to Professor John Study, Deputy Chair of the Board of Directors/CEO of Texila College of Australia, Mr. Hwun Choi, Vice President of Global Strategy of the Korean Exchange, Mr. Phi-Hung Nguyen, CEO of PG Bank Vietnam, Professor Enzo Scannella, Professor of Banking and Finance, University of Palermo/ Editor in Chief of International Journal of Financial Innovation in Banking for their endorsements. We are indebted to our colleagues at Hanoi University, eGalaxy Solutions, La Trobe University, and Monash University for their support when we conducted the research and wrote the book. We also want to thank the editorial and production team at Springer Nature for their helpful assistance. Giang Hoang Not only is this book academic research, but it is also a form of expressing my great love for my homeland, Vietnam, and my family. I am deeply grateful for the love and plan that my late father had for me and the unwavering support of my mother, brothers, and sisters-in-law. I am especially indebted to my little Hoang clan (Phu Hoang, Long Hoang, Quan Hoang, and Nam Hoang) for all the joys they have shared with me. I also extend my special thanks to the Choi family and Loan Nguyen for their encouragement.

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Kok Boon Oh Having been a regular visitor to Vietnam for work and pleasure for over two decades, the country holds a special place in my heart as a place for building effective professional relationships as well as building long-lasting friendships. I would like to thank Hanoi University, my Vietnam’s colleagues, and M.B.A. students who helped to make this possible and this book a reality.

Contents

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Motivation of the Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Research Objectives, Scope, and Methodology . . . . . . . . . . . . . . . . . . 1.3.1 Research Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3.2 Research Scope and Methodology . . . . . . . . . . . . . . . . . . . . . . 1.4 Significance and Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Overview of Chapters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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2 Role of Vietnam in a Changing Global Economy . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Vietnam as an Emerging Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Economic Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.2 State-Owned Enterprise Reform . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Private Enterprise Development . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 Foreign Investment Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.5 Development of the Vietnam Stock Market . . . . . . . . . . . . . . 2.2.6 GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.7 Role of Sovereign Wealth Funds . . . . . . . . . . . . . . . . . . . . . . . 2.3 Vietnam as a Global Economic Player . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 SOEs and International Business . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Global Supply Chains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Trade Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.4 SOEs and Global Supply Chain Governance . . . . . . . . . . . . . 2.3.5 Transformation into the Digital Economy . . . . . . . . . . . . . . . . 2.4 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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3 Literature on Corporate Governance and Ownership Structure . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Theoretical Perspectives on Corporate Governance . . . . . . . . . . . . . . 3.2.1 The Concepts and Theories of Corporate Governance . . . . . 3.2.2 Emergence of the Concepts of Corporate Governance . . . . . 3.2.3 Corporate Governance Mechanisms: Solutions to Agency Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Theoretical Perspective on Board of Directors . . . . . . . . . . . . . . . . . . 3.3.1 The Concept of Board of Directors . . . . . . . . . . . . . . . . . . . . . 3.3.2 Approach to Studies of Board of Directors . . . . . . . . . . . . . . . 3.3.3 Empirical Studies on the Relationship Between Board Characteristics and Firm Performance . . . . . . . . . . . . . . . . . . . 3.3.4 Theoretical Perspective on Chairman Characteristics . . . . . . 3.4 Theoretical Perspective on Ownership Structure . . . . . . . . . . . . . . . . 3.4.1 Ownership Concentration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.2 Insider Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.3 Owner Identity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.4 State Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Studies of Board of Directors, Ownership and Chairman Attributes in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Vietnam’s Corporate Governance, Regulatory and Institutional Settings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Concept of Corporate Governance and Key Features of the Corporate Sector in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Legal and Regulatory Framework and Best Practices of Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 The Law on Enterprise 2005 and Its Amendments: The Most Fundamental Corporate Governance Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Listing Rules by Securities Regulators, Accounting, and Auditing Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Codes of Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Manual of Corporate Governance . . . . . . . . . . . . . . . . . . . . . . 4.4 The General Governance of Structure of a Shareholding Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Preliminary Evaluation of the Corporate Governance System in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Ownership Structure of the Listed Companies in Vietnam . . . . . . . . 4.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Contents

5 The Effect of Board of Directors, Chairman, and Ownership Attributes on the Agency Cost: Empirical Evidence . . . . . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Research Question and Hypothesis Development . . . . . . . . . . . . . . . . 5.2.1 Hypothesis for Board of Directors . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Hypothesis Development for Chairman Attributes . . . . . . . . 5.2.3 Hypothesis Development for Ownership Attributes . . . . . . . 5.3 Research Methodology and Variable Description . . . . . . . . . . . . . . . . 5.3.1 Descriptive Analysis and Univariate Testing . . . . . . . . . . . . . 5.3.2 Panel Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.3 Variable Measurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 Sample Selection and Data Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 Sample Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.2 Data Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 Univariate Analysis: Descriptive Statistics . . . . . . . . . . . . . . . 5.5.2 Bivariate Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.3 Multivariate Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Endogeneity and Further Robustness Check . . . . . . . . . . . . . . . . . . . . 5.6.1 The GMM Estimator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6.2 The DID Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Government in Business: An Analysis of the State Capital Investment Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Research Questions, Hypothesis Development and Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Research Questions and Hypothesis Development . . . . . . . . 6.2.2 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Sample Selection, Data Source and Descriptive Statistics . . . . . . . . . 6.3.1 Sample Selection and Data Source . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Univariate Analysis: Descriptive Statistics . . . . . . . . . . . . . . . 6.4 Empirical Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Empirical Result for Abnormal Returns to Shareholders—Univariate Analysis . . . . . . . . . . . . . . . . . . . 6.4.2 SCIC Ownership and Shareholder Returns—Multiple Regression Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 Endogeneity and Further Robustness Check . . . . . . . . . . . . . . . . . . . . 6.5.1 Endogeneity and Robustness Check for the Relation Between SCIC Ownership and Stock Returns. . . . . . . . . . . . . 6.5.2 Robustness Check for the Relation Between Stock Returns for Buy, Sell and Appointment Announcements in the Two Ownership Classifications . . . . .

xiii

93 93 93 95 99 100 103 103 104 106 118 118 119 120 121 126 135 148 149 153 158 159 167 167 168 168 169 171 171 173 175 175 179 185 186

189

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Contents

6.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 7 Ownership and Governance: Implications for Policymakers and Practitioners Doing Business in Vietnam . . . . . . . . . . . . . . . . . . . . . 7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Outlook of Vietnam and Challenges Ahead . . . . . . . . . . . . . . . . . . . . . 7.2.1 Economic Development Goals . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Analysis of the Results of Our Research and Their Implications . . . 7.3.1 Effect of Appointment of Foreigners to the Supervisory Board on Agency Cost Reduction . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Effect on Presence of Multiple Representatives on Board of Directors, Non-Executive Directors, and Independent Directors on Agency Cost Reduction . . . . . 7.3.3 Positive Impact of Largest Shareholder Ownership on Reducing Agency Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.4 Negative Link Between Second Large Shareholder’s Ownership and Agency Cost Reduction . . . . . . . . . . . . . . . . . 7.3.5 Findings on the SCIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.6 Chairman’s Employment Tenure and Title . . . . . . . . . . . . . . . 7.3.7 No Statistical Evidence of Impact of Foreign Ownership on Agency Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Suggestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Suggestions for Policymakers and Regulatory Bodies in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4.2 Suggestions for Practitioners . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 An Effective Business Model and Concluding Thoughts . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Summary of Results, Effective Model, and Nexus Between Governance Drawback Mitigation and Our Findings . . . . . . . . . . . . . 8.2.1 Summary of Results, Proposed Effective Model and Governance Drawback Mitigation . . . . . . . . . . . . . . . . . . 8.2.2 Nexus Between Governance Mechanism Drawback Mitigation and Findings from Our Study . . . . . . . . . . . . . . . . 8.2.3 Future Consideration for Governance Issues in Vietnam . . . 8.3 Limitations of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 Suggestions for Further Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5 Closing Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

197 197 198 198 199 202 202

203 204 205 205 207 207 208 208 209 209 210 213 213 214 214 217 225 225 227 228 228

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231

About the Authors

Dr. Giang Hoang has worked extensively in Vietnam’s investment banking industry and education sector. She has over 18 years of experience in financial education, research, and advisory services in various areas of finance, such as derivatives, investment and portfolio management, international finance, and corporate governance. Dr. Hoang was also the Deputy Dean of the Faculty of Management and Tourism at Hanoi University and the Executive Director of the Joint Education Program between La Trobe University (Australia) and Hanoi University (Vietnam). She was influential in developing key partnerships for various universities in Vietnam and instrumental in obtaining research grants from international donors. As an academic, she has taught extensively in Australia, Vietnam, Singapore, and Italy. Other previous roles have also been as an Equity Analyst of a securities company and Finance Specialist of the World Bank financed projects. Through research, teaching, and experience running her investment fund, Dr. Hoang has built expertise in corporate governance, which opened doors for her to become a consultant in the field of corporate governance for many listed entities. She is a member of the Australian Investment Association and Vietnamese Investment Institute and an angel investor of several digital asset projects in the United States focusing on decentralisation of governance and web3. Dr. Kok Boon Oh has industry experience working with the US and Asian MNCs in senior management positions overseeing their global business operations. Dr. Oh has worked in roles in these organisations as directors, CEOs, and as C-suite officers in corporate finance, international business, and risk management for over 40 years. Dr. Oh was the Acting/Deputy Head of the Graduate School of Management at La Trobe University in Melbourne, Australia. He was also the M.B.A. Program Director responsible for the programmes offered in both Australia and internationally. He conducted research and taught accounting, finance, enterprise risk management, cybersecurity, technology and innovation management, and international business at La Trobe University. As a senior academic, he travelled extensively to oversee and deliver business and management programmes in China, Mongolia, and Vietnam for xv

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About the Authors

over 20 years. He was also responsible for supervising Ph.D. candidates and, developing and delivering executive education programmes to Australian and international audiences. As a senior member of MNCs and academic institutions, Dr. Oh has been involved in governance, sitting on committees to formulate, implement, and supervise corporate governance policies and practices. Dr. Oh is an Australia Certified Practising Accountant and Malaysian Chartered Accountant. He is a member of the Academic Board of Texila College in Melbourne.

Abbreviations

ADB ASEAN BOD BOS CEO CMSC ESG FDI FOWN FTAs GDP GLCs GMS GSO HNX HOSE ICT IFC IMF MNCs MPI OECD SAMBs SCIC SOECGs SOEEGs SOELGS SSC SWF VAT

Asian Development Bank Association of Southeast Asian Nations Board of Directors Board of Supervisors Chief Executive Directors Commission for the Management of State Capital at Enterprises Environment, Social, and Governance Foreign Direct Investment Foreign Ownership Free Trade Agreements Gross Domestic Product Government Linked Companies General Meeting of Shareholders General Statistics Office Hanoi Stock Exchange HoChiMinh Stock Exchange Information and Communications Technology International Finance Corporation International Money Fund Multinational Corporations Minister of Planning and Investment Organisation for Economic Cooperation and Development State Asset Management Bureaus State Capital Investment Corporation State-Owned Enterprises (SOEs) Affiliated to the Central Government (SOECGs) SOEs Affiliated to the Economic Groups SOEs Affiliated to the Local Government (SOELGs) State Securities Commission Sovereign Wealth Fund Value Added Tax xvii

xviii

VND VNX WB WTO 3C

Abbreviations

Vietnam Dong Vietnam Exchange World Bank World Trade Organisation Computer, Communication, and Consumer electronic

Technical Terms CAR DID EBITDA FCF GMM ROA ROE

Cumulative Abnormal Return Difference In Difference Earnings Before Interest, Tax, Depreciation, and Amortisation Free Cashflows General Method of Moments Return on Assets Return on Equity

List of Figures

Fig. 2.1 Fig. 3.1 Fig. 3.2

Fig. 3.3 Fig. 4.1 Fig. 4.2 Fig. 6.1 Fig. 8.1 Fig. 8.2

Vietnam’s major trading partners in 2019 and 2021 (Source GSO, Vietnam) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of internal and external governance mechanisms . . . . . . Heuristic illustration of the distinction between out-of-equilibrium and equilibrium explanations for certain empirical results. Source Hermalin and Weisbach (2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Theoretical framework of the study . . . . . . . . . . . . . . . . . . . . . . . . . Stages of corporate governance development in Vietnam (Source Adapted from Hu and Hu [2004]) . . . . . . . . . . . . . . . . . . . Governing and other bodies of a listed company . . . . . . . . . . . . . . Event study methodology measurement window . . . . . . . . . . . . . . Effective governance-related business model . . . . . . . . . . . . . . . . . Prospect of Vietnam in the next decades . . . . . . . . . . . . . . . . . . . . .

30 47

49 65 78 84 171 216 226

xix

List of Tables

Table 2.1 Table 2.2 Table 2.3 Table 2.4 Table 2.5 Table 2.6 Table 3.1 Table 5.1 Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 5.6 Table 5.7

Table 5.8

Supervision of equitized SOEs in Vietnam by authorities . . . . . Summary data of the Vietnamese stock market as of 2013 and 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of listed firms and capitalisation of HOSE and HNX (2000–2013 and 2022) Unit: VND Million . . . . . . . . ASEAN sovereign wealth funds . . . . . . . . . . . . . . . . . . . . . . . . . Category of firms in the SCIC holdings . . . . . . . . . . . . . . . . . . . Vietnam’s major trading partners in 2019 and 2021 Unit: US$billion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evolution of the concepts of corporate governance . . . . . . . . . . Summary of variables measurement . . . . . . . . . . . . . . . . . . . . . . Distribution of company-year observations based on type of industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Descriptive statistics for the dependent, independent and control variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pairwise correlation coefficients for the independent variables period from 2006 to 2013 . . . . . . . . . . . . . . . . . . . . . . . Descriptive characteristics of the SCIC firms and non-SCIC firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Descriptive characteristics of five groups of firms . . . . . . . . . . . Fixed-effect estimation of the relationship between board of directors, chairman and ownership structure attributes on agency cost levels for the entire sample . . . . . . . . . . . . . . . . . Fixed-effect estimation of the relationship between agency costs and the interaction terms of the proportion of foreigners on the supervisory board and chairman’s years employed company with the five groups of firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 24 25 27 29 30 41 109 120 122 127 131 133

136

141

xxi

xxii

Table 5.9

Table 5.10

Table 5.11

Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9

Table 6.10

Table 6.11 Table 6.12

Table 8.1 Table 8.2

List of Tables

Fixed-effect estimation of the relationship between the ownership percentages of the five groups of firms as the largest and second largest shareholders in firms and agency cost levels . . . . . . . . . . . . . . . . . . . . . . . . . . GMM system estimates of the relationship between agency costs and board, chairman and ownership attributes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The DID estimates of the influence of the independent directors change as result of the 2012 code of corporate governance on the agency cost levels . . . . . . . . . . . . . . . . . . . . . Distribution of events by year and industry . . . . . . . . . . . . . . . . Descriptive statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Descriptive characteristics of two groups of firms . . . . . . . . . . . Cumulative abnormal returns to SCIC-linked firms’ shareholders—univariate analysis . . . . . . . . . . . . . . . . . . . . . . . . Cumulative abnormal returns for SCIC-linked firms’ shareholders for two groups of firms—univariate analysis . . . . Summary of variable definition . . . . . . . . . . . . . . . . . . . . . . . . . . Pairwise correlation coefficients for the independent variables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Findings for the relationship between SCIC ownership and stock returns—multiple regressions . . . . . . . . . . . . . . . . . . . Findings of the relationship between SCIC ownership and stock returns for buy, sell and appointment announcements—multiple regressions . . . . . . . . . . . . . . . . . . . . Endogeneity test with instrumental variable estimation for the relationship between SCIC ownership and announcement day event abnormal returns . . . . . . . . . . . . . Findings for the non-linear relationship between SCIC ownership and stock returns—multiple regressions . . . . . . . . . . Findings on the impacts of SCIC ownership control on various CARs for buy, sell and appointment announcements—multiple regressions . . . . . . . . . . . . . . . . . . . . State of play of internal and external governance mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nexus between our study findings and mitigation of both external and internal governance mechanisms . . . . . . . .

145

150

155 172 173 174 176 178 181 183 184

185

187 189

190 218 220

Chapter 1

Introduction

Good governance should be like air. Its existence needs not be discussed But its absence would make a huge difference. (Pras Hanth1 )

1.1 Introduction As far back as Adam Smith, it has been recognised that managers do not always act in the best interest of shareholders. The managerial theories of the firm (Baumol, 1959, 1967; Marris, 1964; Williamson, 1964) also suggest that managers would seek to maximise their own utility. Consequently, the divergent goals and interests between agents and principals unavoidably generate costs. The primary driver of agency theory development is to develop mechanisms that ensure an efficient alignment of interest of the two counterparties involved, thereby reducing agency costs (Shankman, 1999). In the Anglo-Saxon economies, with the evolution of modern firms characterised by a large number of atomised shareholders who delegated multiple tasks and decision-making to managers, agents or managers may not always act in the best interest of shareholders. Simon Herbert (quoted in Baysinger & Hoskisson, 1990) proclaimed that managers might be “satisfiers” rather than “maximisers”; that is, they tend to play it safe and seek an acceptable level of growth because they are more concerned with perpetuating their existence than with maximising the value of the firm to its shareholders. This has provided room for managers’ engagement in two main agency problems, namely (i) moral hazard and (ii) adverse selection (Ciancanelli & Gonzalez, 2000). Thus, the traditional agency problems in Anglo-Saxon corporations have emerged because of the separation of ownership and management. However, La Porta et al. (1999) find that the dispersed ownership structure is 1

Quoted in Rana (2021, p. 1).

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 G. Hoang and K. B. Oh, An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets, https://doi.org/10.1007/978-981-99-1505-7_1

1

2

1 Introduction

not as common as what Berle and Means described in their pioneering 1930s work. Instead, firms around the world are usually owned by states and founding families. When large shareholders effectively control firms, their policies may result in the expropriation of minority shareholders. Thomsen and Conyon (2012) described the traditional agency problems as Type 1 agency problems and those in the concentrated ownership system as Type 2 agency problems. To minimise the degree of agency problems, various governance mechanisms can be put into place, which Cremers and Nair (2005) classified into two broad categories—internal and external governance mechanisms. Block-holders and the board of directors are often seen as the primary internal governance mechanism, while the market for corporate control is the primary external mechanism. As Cremers and Nair (2005) highlighted, these different mechanisms work together to provide good governance in firms. While the extant literature on issues relating to corporate governance has been well-developed for advanced economies, especially the US, the UK, Germany, and Japan, there has been little attention paid to similar issues in Vietnam until recently. The awareness is relatively low as the concept of corporate governance frequently is misunderstood as management in many enterprises (World Bank, 2011). In terms of the governance quality of Vietnamese firms, the corporate governance scorecard reports conducted by the World Bank using OECD’s Principles Assessment revealed that the average corporate governance scores of the Vietnamese firms were 41% out of 100% in 2006, then 44% in 2011 and 60% in 2013 (World Bank, 2006, 2011, 2013), which are much lower than those of other countries in the region such as Thailand, Malaysia, and Indonesia.2 The World Bank (2013) also reported that the absence of investor protection procedures or rules and the existence of an imperfect legal system in Vietnam, whose existence could potentially protect against expropriation, further limit investment and other private economic activities, and particularly foreign direct investment. Even though many organisations such as the World Bank, International Finance Corporation, and other international organisations helped the Government of Vietnam with investigating governance reform issues and providing recommendations, they have usually used the OECD’s stakeholder-based approach and employed survey methods in conducting the research, resulting in findings which are relatively general and less robust. In terms of empirical evidence, there are a limited number of academic empirical investigations, and the extant studies tend to examine one or a few governance matters evaluated against firm performance. For instance, Phan (2013) focused on the influence of foreign ownership on firm performance, Vo and Phan (2013) analysed the board diversity and firm performance relationship, and Adhikary and Hoang (2014) documented the nexus between board size and firm performance. It is apparent that those studies do not provide an overall picture of the corporate governance system in Vietnam and fall short of explaining the nature of the governance of Vietnamese firms, which creates a gap for this research to fill. Furthermore, although those studies used firm performance measured by ROE or ROA or Tobin’s 2

Thailand, Malaysia and Indonesia scored 83%, 83% and 72%, respectively, in 2013 (World Bank, 2013).

1.1 Introduction

3

Q as proxies for the dependent variable, our study uses firm-level agency costs as the key variable of interest because agency costs are firm-specific attributes that are potentially less influenced by outside factors (such as share market trading, information asymmetry, imperfect markets), have less noise, and better reflect firm-level decisions and actions. The institutional setting in Vietnam as it pertains to corporate governance is fundamentally different from that of developed Western countries such as the US and the UK. Unlike those countries, hostile takeovers whereby inefficient management teams are replaced are relatively rare. The market for corporate control in Vietnam is characterised by the absence of major antitakeover provisions typically available in developed markets (Pham et al., 2015). There are several reasons for this. First, it can be explained by using the argument of Chandrasegar (1995), who proclaimed that the Asian way of doing business is different in its avoidance of aggression, confrontation, and bitterness. Second, Vietnam is a communist country, and its government tends to impose restrictions to avoid hostile activities by external forces. Therefore, the essential external control mechanism in developed Western economies is generally not used for controlling managerial behaviour in Vietnam. While there is a substantial body of literature on boards of directors and block-holders in both dispersed and concentrated ownership, not much research has been conducted for mixed ownership structure environments like Vietnam. As a result, this book aims to fill the gap by investigating the governance mechanisms employed in Vietnamese firms. It will mainly focus on two main internal governance mechanisms identified by Cremers and Nair (2005): the board of directors and the ownership structure of the firms. Furthermore, when investigating the characteristics of board of directors and ownership structure, this book does not only intend to use the well-researched variables in prior studies, but it will also contribute to the extant literature by employing and testing an idiosyncratic set of variables that specifically describe the attributes of the Vietnamese context. Besides, amid ongoing arrests of top businesspeople in large corporations such as FLC Group and Tan Hoang Minh Group, and the dismissal of the chairman and other key personnel of the State Securities Commissions and Vietnam Stock Exchange due to their wrongdoings, this book also updates and includes current dynamics on the country’s governance front to shed further light on the significance of raising governance quality of Vietnamese firms and the role of regulators in the enforcement of relevant laws and regulations. The remainder of the chapter is structured in the following manner. Section 1.2 provides the motivation of the research. Section 1.3 outlines the objectives, the methodology and the scope of investigation. Section 1.4 discusses the significance and contribution to the literature. The final section (Sect. 1.5) describes the chapters that constitute this research.

4

1 Introduction

1.2 Motivation of the Research In the past, the Vietnamese corporate sector was painted by the dominance of wholly state-owned and collectively owned enterprises, which were structured by four central bodies, namely the General Meeting of Employees, the Communist Party Committee, the Executive Team, and the Labour Union (Pham & Vuong, 2009). The reform of the economy in the late 1980s boosted the corporate sector’s development, resulting in the equitisation and creation of newly born private enterprises. The state-owned enterprises (SOEs) reform resulted in several main outcomes: (i) the equitisation of a thousand state-owned firms with new governing bodies and processes, such as general shareholder meetings, board of directors, supervisory board, and management team, as required by the Enterprise Law (2005, amended in 2014), (ii) the establishment of the State Capital Investment Corporation (hereafter known as the SCIC) and Corporations 90, 91,3 and (iii) the inflow of foreign investment into the economy. After privatisation, the residual state ownership is managed by the following authorities: (1) Central ministries and authorities, (2) Local authorities, (3) Economic groups such as Corporations 90, 91, and (4) State Capital Investment Corporation (OECD, 2013). It is not uncommon for the state to nominate numerous individuals to sit on a company’s board to represent the same state stake. Subsequently, the state is no longer a sole shareholder in firms. Besides the state, there are also various shareholders, such as foreign, institutional, private, and others. The state might also nominate numerous representatives of its ownership to be represented in its linked firms. Meanwhile, the newly established private firms are usually managed by founding family members. Despite being listed, they have been reported to lack transparency and potentially include complex cross-shareholdings that lead to indirect and pyramid forms of corporate control (World Bank, 2013). Thus, the picture of the corporate sector has been represented by numerous players with different characteristics. Not only does the potential conflict exist between shareholders and managers as described in the traditional agency problem common in Anglo-Saxon corporations, or between controlling shareholders and minority shareholders as in most concentrated ownership structure systems such as Germany, Japan, France, or between state shareholders and non-state shareholders such as in China, between local shareholders and foreign shareholders, but it also takes place between various state shareholders. The unique agency problems arising among multiple agents in Vietnamese enterprises pose a great motivation for this study to further explore how this institutional and governance setting is associated with corporate decision-making and operational and performance outcomes by empirically examining the effect of these governance mechanisms on the nature of firm-level agency costs. As espoused by Boubakri et al. (2009), who argued that privatisation usually 3

SCIC is a state mutual fund aimed to help improve governance at privatised SOEs and professionally manage state ownership in linked firms. Corporations 90 and 91 are large-scale corporations operated in the economy’s strategic industries. The details of these organisations are presented in Chapter 2 of this book.

1.2 Motivation of the Research

5

produces a better result for businesses and related stakeholders, we consider that despite the complexity, the arrangements around new governing bodies could be translated into a better outcome for firms. Initially, the study aimed to compare the effect of the current governing bodies of Vietnamese firms on firm performance with that of the previous governing bodies. However, the insufficient data relating to firms prior to the SOE reform does not enable us to undertake that comparison. While the idiosyncratic agency problems are the main motivation of this research, the subsequent explanations provide more insights into why Vietnam presents a unique setting and how boards of directors and block-holdings are unique mechanisms for studying Vietnam’s governance system. First, the ownership structure in Vietnam is distinctive because of its considerable range of ownership types. A quick glance at the Vietnamese public and listed firm ownership structure has shown that, like many other emerging markets, the great majority of these firms have a controlling shareholder and, in many cases, one or two significant block-holders (World Bank, 2013). Specifically, the World Bank (2013) reported that the state appears to be the dominant shareholder, or one of the dominant shareholders, of Vietnamese firms, as more than half of the listed companies report state shares of 25% or higher. However, unlike the Chinese equitised firms where state and legal shares are not tradable (see Firth et al., 2007), trading state shares in Vietnam is permitted. Further, while the level of foreign ownership in Chinese listed firms stands at less than 2% of the outstanding shares (Firth et al., 2007), it is estimated at around 10% in the Vietnamese listed firms. Therefore, the ownership structure of Vietnamese firms should be described as a concentrated and mixed structure, which leads to the governing power being shared among a number of block holders rather than the state alone. In terms of ownership concentration, Chou et al. (2016) categorised two forms of concentrated ownership: (i) controlled structure where large block-holders own most of a company’s shares, and (ii) controlling minority structure, where a shareholder can control a firm while holding only a fraction of its equity. The total ownership of the two largest shareholders in the Vietnamese listed firms, as estimated in our study, is approximately 47.7%, being indicative of the controlled structure type, which differs from most other East Asian countries. Besides, the 2005 Enterprise Law holds that only large owners are entitled to nominate candidates for the board; specifically, only shareholders or groups of shareholders with more than 10% of the outstanding shares have the right to nominate candidates for the board of directors and supervisory board.4 This gives the large shareholders greater power or influence when it comes to the decision-making process for firms. Second, a board of directors is extremely powerful and contains numerous unique characteristics compared to other systems. As discussed, a board of directors is elected at the General Meeting of Shareholders based on the recommendations of the large shareholders. Subsequently, as claimed by Nguyen (2008), most of the Board of Directors members are controlling shareholders or the representatives of controlling shareholders who hold significant power in the company. The Enterprise 4

The details of specific rights are provided in Appendix 2 of this book.

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1 Introduction

Law 2005 provides that the Board of Directors has the power to decide on any matters that are not within the scope of the shareholders’ meeting. This means that the board can overrule the CEO, which is mandated as the decision-making individual within statutory powers to run the company’s daily operations (Minh & Walkers, 2008). In terms of the supervision of the board, adhering to the law results in only certain large or controlling shareholders obtaining access to the board’s materials, which might prevent minority shareholders from obtaining access to this information. Besides, the supervisory board that is assigned to supervise the board is viewed to be ineffective and usually described as “inviting guests”, “friendly consultant”, and “grasped supervisor”, which leaves room for the board of directors to act at their discretion (Ho, 2014). Ho (2014) also reported that, in reality, the priority of new share purchase in many firms is only offered to the board members and some employees. Regarding special features of the Vietnamese board, the following attributes have been pointed out. First, despite being powerful, the board is reportedly inexperienced (World Bank, 2011). Only in the early 1990s was the current concept of the Board of Directors, CEOs, and Supervisory Board introduced in the Company Law and the Law on SOEs. However, these concepts were only applied thoughtfully recently when companies began to draft and adhere to elaborate charters with company rules and regulations. The members of these bodies are inexperienced due to a historical absence of general good practice in their areas. Second, as discussed above, the Government sometimes appoints several individuals from the state authorities to be represented on the board to supervise the same portion of state ownership, giving rise to complexity for the board’s operation. Third, the study of the functioning of the board of directors of Vietnamese firms is not complete without a thorough examination of the role of chairman,5 because this individual serves the symbolic monocratic function that represents the face of the company and deals with the public and various stakeholders. The 2005 Enterprise Law provides that, unless otherwise stated, the chairman is the company’s legal representative and is in the highest-ranked position. This is similar to the Chinese Mainland’s management structure, where the chairman is the top gun of a firm instead of the CEO and exhibits a more significant influence on corporate performance than the general manager. (Cheng et al., 2010)

Lastly, as described, our book focuses on two main internal governance mechanisms: the board of directors and ownership structure. Still, it is also motivated by the establishment of the State Capital Investment Corporation, one of the main themes in the SOEs reform of Vietnam. The unique features of a government mutual fund are arguably worth studying. Unlike Singapore and Malaysia, where the governments established their investment companies such as Temasek, Khazanah Nasional, and Permodalan Nasional Berhad to take an entrepreneurial role by investing in a wide range of companies in various sectors of the economy (Ang & Ding, 2006) due to the lack of private sector funds and expertise (Ramirez & Tan, 2004), the Government of Vietnam constituted the SCIC to commercially manage the state ownership share in the existing equitised companies. While the establishment of the state investment companies in Singapore and Malaysia is based on the principle of effectively 5

This book uses the word “chairman” which refers to the chairperson and does not infer any gender discrimination.

1.3 Research Objectives, Scope, and Methodology

7

separating the government’s shareholder role from its regulatory and policy-making function (Israel, 2008), and they are the sole shareholder representing the state ownership, the SCIC only manages a portfolio of various companies among Vietnam’s equitised companies along with other authorities such as central and local government authorities and other economic groups. That the SCIC is one of the multiple representatives for state ownership makes it a unique entity to be analysed. Also, it might be claimed that the Government of Vietnam adopts some features of the Chinese privatisation process and mimics the China approach of permitting different stakeholders to manage the state ownership share, such as state asset management bureaus (SAMBs), state-owned enterprises (SOEs) affiliated to the central government (SOECGs) and SOEs affiliated to the local government (SOELGs) (Chen et al., 2009). However, whilst the SCIC of Vietnam appears to be a replica of SAMBs in terms of the existence purpose, a closer examination of the process reveals a big difference. In a study into SAMBs, Weiqi (2008) describes SAMBs as a dispersed network of companies geographically located throughout the country with a complicated three-layer system. Specifically, SAMBs must report to the State Assessment Supervision and Administration Commission at the central level and are reported by SAM companies. The traditionally bureaucratic reporting line of SAMBs, according to Wei-qi (2008), hinders them from pursuing commercial purposes and making timely and effective business decisions. Meanwhile, the SCIC is one consolidated organisation directly reporting to the Prime Minister of Vietnam. The SCIC staff are given the authority to make decisions for the firms in its portfolio as long as it adheres to the laws. The great extent of control and simplistic reporting line is intended for the SCIC to exercise power and pursue commercial objectives. In this sense, the Government of Vietnam expected the involvement of the SCIC to translate into better state asset management. Furthermore, while the recent research on state ownership has just focused on the impact of ownership on firm value, this study focuses on the effect of the actions, such as trading activities and personnel appointments by the SCIC, on the value of its linked firms.

1.3 Research Objectives, Scope, and Methodology 1.3.1 Research Objectives This book attempts to provide a better understanding of the internal governance mechanisms and their influence on the agency cost levels in Vietnamese firms. The objectives of the book are presented as follows: The first objective is to comprehensively describe Vietnam’s institutional and regulatory setting and corporate governance system. The book also includes a literature review analysis of the board, chairman, and ownership attributes. The second is to identify the nature of any relationship between the board of directors, chairman, and ownership structure of the Vietnamese firms and their agency cost platform. Specifically, this book only selects the distinguishable features of each mechanism that is demonstrative of the Vietnamese context to examine if they are associated with companies’ agency cost levels. The third objective is to examine the effect that the SCIC has on its linked firms. Specifically, the book investigates if the announcements of specific trading activities and strategic initiatives by the SCIC are associated with the movement of share

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1 Introduction

prices of SCIC-linked firms and if SCIC ownership instils economic incentives for the companies under its supervision. The accomplishment of the first and second objectives will contribute significantly to the current knowledge and understanding of the association between the board of directors and ownership structure and agency cost levels in a context outside the Anglo-Saxon system characterised by the existence of unique agency problems. Achieving the third objective will provide new insights into a state mutual fund special to Vietnam’s corporate setting.

1.3.2 Research Scope and Methodology The first objective of the research is attained by undertaking a summary, synthesis, and critical evaluation of the academic works relevant to our research topics: the Vietnam institutional setting and its corporate governance system. We also review and evaluate current peer-reviewed sustainable literature about the concept of corporate governance, board of directors, chairman, and ownership to write a comprehensive literature review that will identify and discuss the current trend in governance and those mechanisms. To accomplish the second objective, this study employs an empirical analysis of the 617 non-financial Vietnamese companies listed on both the Ho Chi Minh Stock Exchange and the Hanoi Stock Exchange, comprising a sample with 3,333 firm-year observations for the period from 2006 to 2013. Notably, it conducts two different forms of analysis. First, descriptive analysis and univariate testing are employed on the dependent and independent variables to analyse the pattern of characteristics of the board of directors, chairman, and ownership structure and their association with agency costs of sample firms. Second, a panel data fixed effects model is employed to examine the multivariate relationship between these governance mechanisms and agency cost levels. The findings from the fixed effects model are also evaluated using the General Method of Moments (GMM) and Difference in Difference (DID) estimation techniques for robustness purposes. The standard event study analysis with a 160-announcement sample has been used to address the third objective, more specifically, to examine how the announcements of specific trading activities and strategic initiatives by the SCIC are associated with share price and return movements for its linked companies. Further regression analysis is also undertaken to assess the relationship between SCIC ownership levels and firm performance in a multivariate setting.

1.4 Significance and Contribution

9

1.4 Significance and Contribution This book contributes to our understanding of the association between the board characteristics, chairman attributes and ownership structures, and agency cost in the following ways: First, this book provides insights into the agency phenomenon, which is unique to the Vietnamese corporate sector. Not only do conflicts exist in the relationship between managers and shareholders as described in the traditional Western literature, between controlling shareholders and minority shareholders in concentrated ownership structures such as in continental Europe and Eastern Asia, between state shareholders and non-state shareholders as in China and Russia, the conflicts also emerge between local and foreign shareholders and between various state shareholder representatives. The study’s results add to the literature, particularly relating the uniqueness of the board characteristics and their association with agency costs. While prior evidence on this issue, particularly from the AngloSaxon and European countries, focused on several variables such as board size, the proportion of non-executive directors, board diversity, board meeting frequency, and firm performance levels, this study adds to the extant literature by examining the effect of several attributes that are peculiar to the Vietnamese context on agency cost platforms. These include the presence of multiple state representatives for the same state ownership claim on the board of directors, the presence of SCIC staff on the board of directors, the proportion of foreigners on the supervisory board, the size of the supervisory board, and so forth. Second, this study builds a model of the expected relationship between the board of directors, chairman, and ownership attributes and firm-level agency costs. While most of the extant literature on Vietnamese firms focuses on one or a few variables and firm performance measured by ROE or ROA or Tobin’s Q over a short period, and with relatively small numbers of observations, this study uses agency costs as the dependent variable of interest and conducts an analysis of the vast majority of the non-financial listed firms on both stock exchanges of Vietnam over a long period to provide an exhaustive description of the Vietnamese firms’ governance features. Third, this book aims to provide insights and additional guidance for policymakers in Vietnam to improve corporate governance guidelines’ design and implementation. Specifically, our study, similar to the assessment of the World Bank (2013), finds that the Vietnamese governance system is in its infant stage. Therefore, it suggests that the Government of Vietnam should encourage firms to adopt best practices in corporate governance in the long term, as recommended by the OECD and in the codes of corporate governance developed by advanced countries, rather than merely rely on the current effective governance mechanisms. The reasons are as follows. First, at this nascent stage of governance practice development and under the circumstance of most of the listed firms having the state or the founding family as a dominant shareholder, our study reports that the length of time the chairman has been employed by the company, the magnitude

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1 Introduction

of largest shareholder ownership, and the presence of multiple state representatives on the board of directors supervising the same portion of ownership is observed to reduce the level of agency costs. These findings align with those from the traditional capitalism-based markets in which the functions of risk-carrying, reward-receiving, and decision-making in firms being united in one individual usually result in better performance (Marris, 1998). However, this might not hold true in the future as firms are expanding. The trend is similar to that of China, which strives to minimise the presence of state representatives on the board of directors. Second, the literature shows that entrenchment effects in firms are existent and exacerbated along with the tenure of their upper echelons, suggesting that the firm monitoring quality of block shareholders and long-tenured chairmen might not last in the long run. This book also presents some evidence in relation to the SCIC’s performance. Despite having a business-oriented goal in managing the residual state ownership in equitised firms, the findings of this study found sufficient evidence of the SCIC role in its linked firms. However, they are not entirely in favour of the effectiveness of the SCIC personnel on boards of directors and its controlling ownership in its linked firms. From a policy perspective, this would suggest that the SCIC’s direct reporting line to the Prime Minister of Vietnam might not be totally relevant and might require a certain degree of additional monitoring of the SCIC operations towards firms. It is worth noting that for some reason, the SCIC no longer reported directly to the Prime Minister since 2015, and from 2018 it was housed under the Commission for the Management of State Capital at Enterprises.

1.5 Overview of Chapters This study consists of eight chapters. This chapter introduces the study, with Chapter 2 discussing the role of Vietnam in a changing world. Chapter 3 reviews the extant literature, whereas Chapter 4 outlines key feature of the Vietnamese legal and regulatory framework of corporate governance and corporate governance best practices. Chapters 5 and 6 provide empirical evidence. Chapter 7 discusses the outlook of Vietnam as an emerging player in the global economy and how the findings of our research might contribute to the success of goal achievement for the country. Chapter 8 summarises the book and proposes a governance-related effective business model. This chapter provides an overview of the research topic, scope, objectives, and methodology. Also, the contribution of this study to the corporate governance literature is included. Chapter 2 provides an overview of the Vietnamese institutional setting. This section begins with a short description of the Vietnamese political-economic transition, which has transformed the country from a fully planned economy to a more market-oriented economy. Insights into Vietnam’s economic development with the SOEs reform and creation of private firms, the birth of the stock market, the State Capital Investment Corporation, the Commission for the Management of State

1.5 Overview of Chapters

11

Capital at Enterprises, and the rising role of Vietnam as a global supply chain player are provided in this Chapter. Chapter 3 reviews the literature on board of directors, chairman, and ownership attributes. This Chapter aims to document the concepts, aspects, and issues of corporate governance in general and the board of directors and blockholder ownership as internal mechanisms in particular. It begins by discussing the concept throughout the historical development of the theory of the firm and postulates different approaches to corporate governance. This is then followed by how the agency problems have emerged and have been handled through various mechanisms. The empirical evidence on the relationship between the governance mechanisms and the firm measures is also embraced in this Chapter. It concludes by demonstrating the theoretical framework for the empirical analysis. Chapter 4 highlights the corporate governance system in Vietnam, focusing on the board of directors and ownership structure. The Chapter starts with a short description of the stages of corporate governance developments in Vietnam, then provides an exhaustive discussion on the legal, regulatory framework, and best practices of corporate governance. It also displays a preliminary evaluation of the governance quality of Vietnamese firms. A governing structure of a firm and the overall ownership structure concludes the Chapter. Chapter 5 empirically investigates the relationship between agency costs and the board, chairman, and ownership characteristics for non-financial firms listed on the Ho Chi Minh Stock Exchange and Hanoi Stock Exchange of Vietnam from 2006 to 2013. The Chapter begins with the research questions and hypothesis development. It then outlines the research model and the measurement of variables that are expected to be associated with agency costs. The Chapter then describes how the sample and dataset are constructed. The subsequent section presents and interprets the empirical findings. Finally, it concludes with additional endogeneity and robustness checks and analysis. Chapter 6 presents the empirical analysis of the role of the SCIC within its linked firms. It commences with the research questions, methods, and data description, followed by the sample’s descriptive statistics and the main empirical results. The final section provides a further robustness check and then concludes the Chapter. Chapter 7 includes elaboration and extrapolation of the results to Vietnam’s role as a key emerging market in the global economy/supply chain vis-à-vis other emerging markets in the region. The content will be an extension of Chapter 2 above with justification of the theoretical constructs (Chapter 3) and empirical results (Chapters 5 and 6). Chapter 8 concludes this book. It contains a summary of the main results and a governance-related business model. The Chapter also presents recommendations, conclusions, implications, and suggestions for further research.

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References Adhikary, B. K., & Hoang, L. H. G. (2014). Board structure and firm performance in emerging economies: Evidence from Vietnam. Ruhuna Journal of Management and Finance, 1(1), 53–72. Ang, J. S., & Ding, D. K. (2006). Government ownership and the performance of governmentlinked companies: The case of Singapore. Journal of Multinational Financial Management, 16(1), 64–88. https://doi.org/10.1016/j.mulfin.2005.04.010 Baumol, W. (1959). Business behavior, value and growth. Macmillan. Baumol, W. J. (1967). Business behavior, value and growth. Macmillan. Baysinger, B., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. The Academy of Management Review, 15(1), 72–87. https://doi.org/10.2307/258106 Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. Harcourt Brace and World Inc. Boubakri, N., Cosset, J.-C., & Guedhami, O. (2009). From state to private ownership: Issues from strategic industries. Journal of Banking & Finance, 33(2), 367–379. https://doi.org/10.1016/j. jbankfin.2008.08.012 Chandrasegar, C. (1995). Take-overs and Mergers. Singapore Journal of Legal Studies, 25(2), 275–277. Cheng, L. T. W., Chan, R. Y. K., & Leung, T. Y. (2010). Management demography and corporate performance: Evidence from China. International Business Review, 19(3), 261–275. https://doi. org/10.1016/j.ibusrev.2009.12.007 Chen, G., Firth, M., & Xu, L. (2009). Does the type of ownership control matter? Evidence from China’s listed companies. Journal of Banking & Finance, 33(1), 171–181. https://doi.org/10. 1016/j.jbankfin.2007.12.023 Chou, H.-I., Hamill, P. A., & Yeh, Y.-H. (2016). Are all regulatory compliant independent director appointments the same? An analysis of Taiwanese board appointments. Journal of Corporate Finance. https://doi.org/10.1016/j.jcorpfin.2016.10.012 Ciancanelli, P., & Reyes-Gonzalez, J. A. (2000). Corporate governance in banking: A conceptual framework. Retrieved from http://papers.ssrn.com/abstract=253714 Cremers, K. J. M., & Nair, V. B. (2005). Governance mechanisms and equity prices. The Journal of Finance (new York), 60(6), 2859–2894. https://doi.org/10.1111/j.1540-6261.2005.00819.x Firth, M., Fung, P. M. Y., & Rui, O. M. (2007). Ownership, two-tier board structure, and the informativeness of earnings—Evidence from China. Journal of Accounting and Public Policy, 26(4), 463–496. https://doi.org/10.1016/j.jaccpubpol.2007.05.004 Ho, T. (2014). Corporate governance: The effects of board attributes on performance of listed firms in Vietnam (A Master’s thesis). Retrieved from https://opus4.kobv.de/opus4-hwr/frontd oor/index/index/year/2015/docId/358 Israel, S. C. (2008). ‘Temasek holdings: A Dependable Investor in the United States’ (Working Papers). Foreign Government Investment in the United States Economy and Financial Sector. The USA. Retrieved from http://www.temasek.com.sg/mediacentre/speeches?detailid=8609 La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law, Economics, and Organization, 15(1), 222–279. https://doi.org/10.1093/jleo/15. 1.222 Marris, R. L. (1964). The economic theory of “managerial” capitalism. Springer. Marris, R. (1998). Managerial capitalism in retrospect. Springer. Minh, T. L., & Walker, G. (2008). Corporate governance of listed companies in Vietnam. Bond Law Review, 20(2), 118–197. https://doi.org/10.53300/001c.5520 Nguyen, D. C. (2008). Corporate governance in Vietnam: Regulations, practices and problems. Central Institute of Economic Management Publisher. Pham, M. C., & Vuong, H. Q. (2009). Vietnam economy: The rise, fall and shift. National Political Publisher of Vietnam.

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Pham, N., Oh, K. B., & Pech, R. (2015). Mergers and acquisitions: CEO duality, operating performance and stock returns in Vietnam. Pacific-Basin Finance Journal, 35, 298–316. https://doi. org/10.1016/j.pacfin.2015.01.007 Phan, H. V. (2013). Foreign ownership and performance of listed firms: Evidence from an emerging economy. The Bulletin of the Graduate School of Commerce, 77, 285–310. Ramirez, C. D., & Tan, L. H. (2004). Singapore Inc. versus the private sector: Are government-linked companies different? IMF Staff Papers, 51(3), 510–528. https://doi.org/10.2307/30035960 Rana, S. (2021). Understanding good governance. Retrieved from https://eduindex.org/2021/ 07/19/understanding-good-governance/#:~:text=%E2%80%9CGOOD%20GOVERNANCE% 20SHOULD%20BE%20LIKE%20AIR.%20IT%E2%80%99S%20EXISTENCE,%E2%80% 9CGovernance%E2%80%9D%20and%20%E2%80%9CGood%20Governance%E2%80% 9D%20are%20being%20used%20widely. Shankman, N. A. (1999). Reframing the debate between agency and stakeholder theories of the firm. Journal of Business Ethics, 19(4), 319–334. Thomsen, S., & Conyon, M. (2012). Corporate governance: Mechanisms and systems. McGraw Hill. Wei-qi, C. (2008). State assets management bureau: A right strategy? The Journal of Comparative Asian Development, 7(1), 47–79. https://doi.org/10.1080/15339114.2008.9678454 Williamson, O. E. (1964). The economics of discretionary behaviour: Managerial objectives in a theory of the firm. Prentice-Hall. World Bank. (2006). Corporate Governance Country Assessment: Vietnam Report on the Observance of Standards and Codes (ROSC). World Bank. (2011). Corporate Governance Country Assessment: Vietnam Report on the Observance of Standards and Codes (ROSC). World Bank. (2013). Corporate Governance Country Assessment: Vietnam Report on the Observance of Standards and Codes (ROSC).

Chapter 2

Role of Vietnam in a Changing Global Economy

2.1 Introduction The state sector is still crucial to the growth of the global economy. Good corporate governance is essential to ensure that state-owned firms contribute to the economy’s efficiency and competitiveness. This chapter covers the economic role of Vietnam as a growing emerging market in the global economy. An overview of Vietnam’s economic development and role as a key emerging market is provided. The Chapter analyses how Vietnam has been integrating with the world economy, the role of the government in this, and the road ahead. Vietnam has become a hub for foreign direct investment and manufacturing in Southeast Asia. By 2017, it was the largest exporter of clothing and the second largest exporter of electronics, after Singapore, in the region. The main goal of this chapter is to investigate and analyse how corporate governance affects the capability and management of global supply chains (GSC). We are interested in knowing the direct impact of corporate governance on the global supply chain operational performance, which will be helpful for policymakers in understanding the issues related to the corporate governance of global supply chain management. We discuss the role of corporations, both state-owned enterprises (SOEs) & private (local & foreign), in their specific approaches and contributions to supporting this growth development. They include sovereign wealth funds, equitisation, privatisation, foreign direct investment (FDI), and local-foreign joint ventures. Section 2.2 starts by explaining the economic changes implemented since the inception of Doi Moi in 1986, together with favourable global trends, which have enabled Vietnam to transition from one of the world’s poorest countries to a middleincome economy in less than a generation. GDP per capita increased 2.7 times between 2002 and 2020, reaching over US$2,800. Over the same period, poverty rates (US$1.90/day) fell sharply from over 32% in 2011 to under 2% (World Bank).1

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https://www.worldbank.org/en/country/vietnam/overview#1.

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 G. Hoang and K. B. Oh, An Empirical Study of SOE Corporate Governance Attributes for Emerging Markets, https://doi.org/10.1007/978-981-99-1505-7_2

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Section 2.3 examines Vietnam as a global economic player and the corporate ramifications to its global supply chain development and critically how SOE boards and board members should behave to address and navigate their corporate governance towards their Global Supply Chains. We examine government ownership and board representation in SOEs and their influence on corporate governance in GSC management. Section 2.4 will conclude the Chapter.

2.2 Vietnam as an Emerging Market The disruptive events over the last few years from the covid-19 pandemic, the USChina trade, the technology war, and geopolitical volatility have led to changing economic conditions in Asian emerging markets and their roles in global supply chain diversification and realignment. Vietnam has not been spared from the Asian supply chain shifts due to recent volatility. Vietnam is a rising star of emerging markets regarding global trade growth, and the country has been a model of progress for other regional emerging markets. Its exports are worth as much as the total value of its GDP, with economic growth of 6–7% that rivals China. Vietnam has reaped significant income, trade, and investment gains thanks to economic restructuring and greater integration with the world economic system. As a method of supporting domestic reform, Vietnam has leveraged deeper integration with the international economic system, including admission to the World Trade Organization in 2007 and completing a slew of free trade agreements. Vietnam joined the ASEAN free trade area in 1995 and signed a free trade agreement with the US in 2000. According to the World Bank,2 Vietnam’s signing of the most recent trade agreement Regional Comprehensive Economic Partnership (RCEP), will allow for more development and trade in the form of integrated markets for Vietnamese goods. Its trade liberalization is complemented by domestic reforms through deregulation, investment in infrastructure and human capital, and lower cost of doing business in driving economic development. With a rapidly growing population of 95 million today, half of whom are under 35, Vietnam constitutes a significant consumption and human capital market. As a result, Vietnam has made significant public investments in human capital development, recognising that a bigger population equals more job opportunities. The labour force is 56 million in 2021,3 with jobs moving up the value chain into high-tech services, manufacturing, agribusiness, and electronics.

2

The World Bank’s white paper “Estimating the Economic and Distribution Impacts of the Regional Comprehensive Economic Partnership” describes four alternative scenarios to estimate the economic and distributional impacts of the RCEP in Vietnam. https://openknowledge.worldb ank.org/bitstream/handle/10986/37012/Estimating-the-Economic-and-Distributional-Impacts-ofthe-Regional-Comprehensive-Economic-Partnership.pdf?sequence=1&isAllowed=y. 3 World Bank data. https://data.worldbank.org/indicator/SL.TLF.TOTL.IN?locations=VN.

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2.2.1 Economic Background In its history, Vietnam barely had economic prosperity that lasted for decades (Vuong, 2016). Until the early twentieth century, the feudalist nation was a small and outdated agrarian country with continuous wars, invasions from the North (China and Mongolia), and conflicts with the Southwest neighbour (Cambodia). In the twentieth century, the French and American wars drew most national efforts to serve the combats. From the national unification during the 1975 to 1985 period, the nation struggled with its five-year plans for the collectivisation of agricultural and industrial production. However, the real results were often far behind expectation because the guiding principles “violated the most important motivation for production development, that it worked against the working people’s vital vested interests” (Boothroyd & Pham, 2000). The failure of the 1985 price-wage-currency adjustment scheme led to a severe economic crisis, resulting in hyperinflation of 775% in 1986, scarcity of staples and consumer goods, impoverished living conditions, industrial stagnation, and mounting foreign debts (Pham & Vuong, 2009; Vuong et al., 2011). The situation worsened as Vietnam could barely trade with the West due to the U.S. trade embargo (Cockburn, 1994). The chaos had put the Communist Party of Vietnam under immense pressure to get the country out of the crisis. Doi Moi policies were an answer introduced in 1986, which Riedel and Turley (1999) believed reflected no political revolution or ideological conversion on the part of the leadership. While the socialist ideology remained (Vuong, 2016), the Doi Moi reform had its emphasis on the economic side, which Pesek (2013) specified involved the Government of Vietnam allowing privately-owned companies to participate in the economy and opening up key sectors, such as agriculture. Vietnam transitioned from a highly centralised command economy to a mixed economy after 1986. The Doi Moi period enabled the country to achieve high economic growth after joining the competitive global economy and executing systematic changes. The government has championed ambitious structural change to address economic difficulties such as public debt, SOE equity, non-trade obstacles, environmental sustainability, and social justice.4 Therefore, political and economic reforms (“Doi Moi”) launched in 1986 have transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middleincome country within a quarter of a century with per capita income of US$1,130 by the end of 2010 and US$3,694 by the end of 2021, respectively (World Bank, 2011, 2022). Baum (2020) described Vietnam as a global development success story. However, one of the enduring paradoxes in Vietnam’s remarkable economic growth experienced in the nearly three decades since 1986 is the lack of a well-established legal system supporting the increasingly decentralised and marketising economy and a slow change in ownership from state to private. This situation is paralleled by poor corporate governance standards in enterprise inner workings, rated at 44% out of 4

Vietnam 2035 report is a government economic reform plan focusing on achieving upper-middle income status.

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2 Role of Vietnam in a Changing Global Economy

100% according to a report by the World Bank (2011). It poses a challenge as to how Vietnam could instil economic incentives in the absence of investor protection and how an imperfect legal system could protect against the possibility of expropriation that would typically limit investment and other private economic activities, particularly foreign direct investment. In attempting to provide a synopsis of the context of Vietnamese enterprises, it is essential to take a step back to examine the history of Vietnamese enterprises. Vo (2011) demonstrated that privatisation over the last two decades in Vietnam had taken place via four principal methods: (i) the sale of small and under-performing SOEs; (ii) joint-venture agreements with foreign partners; (iii) the equitisation of SOEs; and (iv) private offerings of ownership. Limiting its scope, this research combines points (i) and (iii) as described in Vo’s work to highlight Vietnam’s economic background around three main themes: the state-owned enterprise (SOE) reform, the development of de-novo private enterprises, and increases in foreign investment flows.

2.2.2 State-Owned Enterprise Reform The SOEs sector of Vietnam has undergone a long development process and has been a vital pillar in Vietnam’s economy (OECD, 2013). Yet it also served as a drag to the country’s economic development, which required the government to implement an economic reform process. The SOEs reform did not start until the early 1990s and has been mainly attributed to three measures: (1) the equitisation of SOEs with private interest being permitted, (2) the establishment of “State Corporation 90”, “State Corporation 91” and other economic groups which operate as parentsubsidiary companies, (3) the establishment of the State Capital Investment Corporation (SCIC) to represent the state’s ownership in equitised SOEs and enhance the efficiency of state capital utilisation. First, the equitisation process permitting private interests reduced the number of SOEs with 100% state ownership from more than 12,000 in 1996 to 6,000 in 2000 and about 1,309 in 2011 while creating approximately 4,000 equitised enterprises (OECD, 2013). Specifically, small-scale or unprofitable SOEs were merged or dissolved. A large number of fully state-owned SOEs were transferred, sold, or rented. Since the reform’s inception, more than VND55,000 billion or USD$2.62 billion equivalent has been mobilised for the SOE Reform and Equitisation Support Fund, which mainly originated from revenue from the sale of state capital and dividends (OECD, 2013). This process has been accelerated more progressively in recent years. Specifically, the Vietnamese government aimed to equitise 406 state-owned enterprises during the 2017–2020 period. Under this plan would only be 103 wholly owned SOEs by 2020 (Minh, 2017). Second, the other form of SOE reform has been establishing State Corporation 90, State Corporate 91, and economic groups operating as parent-subsidiary companies. State Corporations 90 and 91 are state-owned corporations that have been reorganised under Decisions 90 and 91 by the Government of Vietnam in 1994. As of 2013,

2.2 Vietnam as an Emerging Market

19

Vietnam has 13 economic groups, ten state corporations 91, 80 state corporations 90, and two commercial banks that the government wholly owns (OECD, 2013). These corporations are large-scale in terms of charter capital and operate in several strategic sectors that aim to play an essential role in the national economy (OECD, 2013). Lastly, establishing the SCIC is an important step to eliminate government administrative intervention in SOEs’ operations and improve the management of the government’s ownership in SOEs. The purpose of the SCIC is to retain its presence in numerous backbone industries to support the country’s long-term economic development strategies and to become a professional investor and shareholder representing the state capital in SOEs. Despite substantial progress, the SOE reform process still faces many limitations, summarised as follows. First, the SOE’s ownership structure changes have been much less than originally expected. By 2011, only about an estimated 30% of state ownership in SOEs was equitised, and the government retained an average ownership stake of 57% in these firms. As such, in the 20 years since the commencement of the equitisation process, less than 15% of state ownership has been transformed from the government to employees or other shareholders. Second, the establishment of State Corporations 90 and 91, together with the SCIC and their roles in representing state ownership, set the foundation for complications in the ownership structure in the equitised firms due to overlapping management. It is not uncommon that multiple authorities jointly manage equitised SOEs with numerous objectives. Table 2.1 below shows the various authorities governing state ownership in the equitised SOEs. As can be seen, the central government and local authority manage nearly 90% of the state stake. Besides, when the central government and local authorities, such as ministries and people committees, act as shareholders for state ownership in firms, they take dual roles as both regulators and shareholders, which leads to the complication of governance in firms and causes a conflict of interest. Third, the Government favourably treated SOEs and equitised SOEs, including individual corporations and economic groups, compared with other business segments, notably in their access to financing. This, consequently, favours statelinked companies over their competition, which might lead to inefficient use of resources. Table 2.1 Supervision of equitized SOEs in Vietnam by authorities

Supervisory authority

1992–2000 (%) 2001–2011 (%)

Central government authority

31.29

31.79

Local authority

63.44

57.79

5.27

10.42

State corporation/economic group Source OECD (2013)

20

2 Role of Vietnam in a Changing Global Economy

Adding complexity to the picture is a variety of scandals at these giant entities, such as the collapse of state shipping giant Vinashin in 2008 and the wrongdoings at PetroVietnam, resulting in arrests of its former chairman and other top executives in 2017 (Reuters, 2017). Thus, as Vuving (2010) describes, state-owned conglomerates are “dinosaurs in a juvenile economy.” These corporations have failed to become the nation’s iron fists—neither have they emerged strongly in international competition, nor have they accomplished well the political tasks. Instead, they try to capitalise on their state-sanctioned privileges and monopolistic position for their own profit. As a result, they become producers of inefficiency and corruption. As discussed above, the equitisation process has been in limbo for a prolonged time, so the Government of Vietnam decided to put the pedal into the metal by introducing a breakthrough initiative—establishment of the Commission for the Management of State Capital at Enterprises (CMSC) in 2018 (Phuong, 2018). The CMSC is founded to replace ministries, ministerial agencies, agencies under the Government’s purview, and provincial-level People’s Committees as the state’s representative concerning state capital. The CMSC is supposed to act as a single representative for state ownership in relevant enterprises, amongst others. In its first attempt, it takes over state ownership in the State Capital Investment Corporation and 18 other state economic groups and corporations5 ; the aggregate value of state capital is estimated to be 50% of the total state capital invested in enterprises. Since its inception, the CMSC has expanded its supervision to other state-owned enterprises and has been evaluated to have successfully achieved its initial targets. It is projected that the CMSC will finally manage a total asset of more than VND 2,300 trillion (US$100 billion), or two-thirds of the state sector in the economy by value (Vuving, 2019). The establishment of the CMSC, as Ha (2019) argued, might cause complexity in how the relationship between the SOEs and the CMSC will be regulated under the current Enterprise Law for non-banking and banking enterprises, and certainly requires clarity towards this end. However, even with no empirical evidence of the CMSC’s effectiveness, one cannot deny that the CMSC serves two clear purposes: first, to reduce the complexity of multiple state ownership representatives, as highlighted above, and second, to accelerate equitisation. Both agendas potentially give rise to better performance in these SOEs and facilitate Vietnam’s private sector to achieve the GDP contribution metric of 60–70% adhering to the international best practice.

2.2.3 Private Enterprise Development A distinctive feature of the Vietnamese business landscape is the development of de novo private enterprises, which are businesses started by entrepreneurs, including a growing number of the self-employed. Suffering from a lack of recognition of their institutional rights with only some acknowledgment in regulation in 1990, and 5

The list of 19 entities is provided in Appendix 4 of this book (Source: CMSC, 2019).

2.2 Vietnam as an Emerging Market

21

suffering credit constraints even in the early 2000s, private enterprises developed in the mid-2000s, and ultimately became fully recognised in law in 2005 with the Law on Enterprises. The non-state sector, nevertheless, has been a strong driver of Vietnam’s growth and started to challenge the importance of SOEs in generating industrial output by the late 2000s. Given the legal constraints directly faced through the legal and regulatory system and indirectly via credit, these private firms tend to raise funds through IPOs and attract foreign investment. Development of the local private enterprise sector Even though most of Vietnam’s private businesses are expanding without the government’s direct support,6 they have studied the strategies and tactics that successfully granted them more power in their battles with powerful state-linked firms or multinational competitors. According to the General Statistics Office (GSO), Vietnam’s private sector has more than 700,000 small and medium firms and 5.2 million business households (General Statistics Office, 2021). During the 2017–20 period, the private sector’s contribution to the GDP increased from 41.75% in 2017 to 42.68% in 2020, making up the most significant proportion among economic sectors, followed by the state-owned sector with 33% (Thuy, 2021). The GSO also revealed that the private sector employs 83.3% of the labour force (General Statistics Office, 2021). Interestingly, even though the private sector contributes around 43% to the country’s GDP, only ten percent is from private firms, and the other 33% derives from household-based businesses. Nevertheless, the household businesses, very much like quiet heroes, are not treated as they should have been and are not given a fair share of access to government resources. Challenges of the local private enterprise sector Vietnam’s private firms and household-based businesses have built on strength to make a remarkable presence in the domestic market, contributing significantly to the economy and even gradually launching their international expansion. Nonetheless, according to the Ministry of Planning and Investment of Vietnam (MPI), more than 96% of firms in this sector are micro and small-sized; therefore, their resilience to external shocks remains weak, making it difficult to connect to the global value chain (MPI, 2021). Statistics from the same source also showed only 15% of private enterprises are suppliers to FDI enterprises in the country. More than 8% are likely to export directly, and 7.4% can export indirectly through a third country. In addition, experts recommended that, for a typical well-functioning economy, the contribution of the private sector to GDP should be around 60–70% (Thoan, 2022). Thus, while the growth of the private sector has been a pivotal contributor to the development of Vietnam’s economy, it is yet to live up to international standards. This points to the two key questions that both the Government of Vietnam and the sector need to address: First, what do private enterprises and business households do to stay strong and resilient to lead its race in the economy and not be swept under by the tide 6

Dinh, H. T. 2013, Light Manufacturing in Vietnam Creating Jobs and Prosperity in a MiddleIncome Economy, The World Bank, Washington, DC.

22

2 Role of Vietnam in a Changing Global Economy

of foreign competition? Second, how will the Government create a level playing field and support the private sector, especially tapping into the household-based business segment, and then capitalise on their potential? The comprehensive answer to these questions is generally stretched beyond the scope of our research. However, we will offer some recommendations in Chapter 7, incorporating the findings from our empirical analysis in Chapters 5 and 6 of the book.

2.2.4 Foreign Investment Flow Domestic reforms were part of the Government’s aim for an open economy. In 1986, the Government passed its first Foreign Investment Law, allowing foreign corporations to invest in the country. The law has been updated several times to embrace a more pro-investor stance while attempting to eliminate administrative bureaucracy and improve foreign investment facilitation in Vietnam. Vietnam has successfully attracted large volumes of foreign direct and portfolio (i.e., indirect) investments. A report by the US Department of State (2013) shows that the country has sustained levels of foreign direct investment at around US$10–12 billion per year over the last six years. This study, nonetheless, merely focuses on discussing foreign investment in the stock market. Adhering to the Law on Securities and other regulations on foreign portfolio investment, foreign investors, either individuals or institutions, are permitted to participate in the Vietnam stock market. However, their investment is subject to a ceiling ownership limit of 30 and 49% in the banking and financial services and non-financial sectors, respectively. In a study that set out to determine attributes of foreign investment in the Vietnam stock market, Vo (2010) found that over the one year from 2007 to 2008, total average foreign ownership increased from 10.10 to 17.45% in listed firms on the Ho Chi Minh Stock Exchange (HOSE), then decreased to 14.79% in 2009. Additionally, the study shows that foreign investors prefer investment in large firms, firms with high book-to-market ratios, and firms with low leverage levels. These investors also avoided firms with dominant shareholders and chose to invest in firms where they could exert influence. The increase of foreign capital inflow into the Vietnam stock market has continued to be a key theme over recent years. A report prepared by the Hanoi Stock Exchange (HNX) in 2014 (HNX, 2014) has highlighted that those net purchases by foreign investors in 2013 alone reached a peak of US$326 million, which is 55% higher than in 2012. Similarly, the dataset from this study also supports the upward trend of foreign ownership in listed companies, which is estimated at 10% on average. To lure more international investors to a stock market that is 14 times smaller than Singapore’s, a proposal that aims to raise the foreign ownership limit for publicly traded companies from the existing 49% was submitted to the Government in 2013 (Bloomberg, 2013). This proposal was then approved by the Government of Vietnam in June 2015, permitting full foreign ownership from the previous cap of 49%, though subject to a list of details on which firms are eligible (Jennings, 2015). Currently,

2.2 Vietnam as an Emerging Market

23

while some restrictions are in place, the Securities Law and its relevant decree lift the foreign ownership limit for public companies (excluding banks) to 100%. On the foreign direct investment (FDI) front, Vietnam has formed a special working group headed by the Minister of Planning and Investment to support the relocation of multinational investment capital inflows that are diversifying their investment locations and repositioning industrial facilities in response to the ChinaUS trade war and the aftermath of the COVID-19 epidemic.7 The special working group would provide an impetus for the design of new regulations to make it a hub for foreign investment and manufacturing in Southeast Asia by putting in place the required infrastructure and adopting competitive and market-friendly investment policies to develop Vietnam into a global strategic investment destination. Vietnam has high-productivity firms that produce for export and use modern methods and technology. These enterprises are backed by foreign direct investment (FDI). A recent media report claims that Chinese businessman Li Ka-Shing and Japan’s ORIX Group would invest billions in infrastructure in Vietnam.8 According to MPI’s Foreign Investment Agency (FIA), the major multinationals that have a presence in the country include Panasonic, Toshiba, Pegatron, Samsung, Apple, Intel, Nintendo, Foxconn, Kyocera, LG, Winstron NeWeb Corporation, Bosch, Exxon Mobil and Millennium Corporation9 and their presence is helping to redefine and restructure Vietnam’s role in the regional and global supply chains.

2.2.5 Development of the Vietnam Stock Market The formation of the stock market in Vietnam had its root in 1996 when the government formally established the State Securities Commission. However, not until 2000 was the first stock exchange, the Ho Chi Minh Stock exchange (HOSE), founded in Ho Chi Minh City with only two firms listed on the first day of trading. Hanoi Stock Exchange (HNX) was founded in 2005. While HOSE accommodates largescale listed companies, small and medium-sized companies typically obtain listings on the HNX because of its lower capital requirement level. To cope with the growing demand for capital by public-yet-unlisted firms,10 the Unlisted Public Company Market (UPCoM) officially came into existence in 2009. With UPCoM operating under a flexible mechanism for the interest of companies and investors, public companies more actively participate in the securities market, which aims to set a roadmap for a modern over-the-counter (OTC) market in Vietnam. 7

Vietnam Investment Review, “Vietnam sets up a special working group to ride the wave of investment relocation,” 25 May 2020. 8 The Saigon Times, “Van Thinh Phat and two leading Asian firms mull investment in HCMC,” 14 April 2022. https://english.thesaigontimes.vn/van-thinh-phat-and-two-leading-asianfirms-mull-investment-in-hcmc/. 9 Vietnam Investment Review, “Nation entices many relocating companies”, 30 September 2020. 10 Public-yet-unlisted firms are firms that have at least 100 shareholders and chartered equity of VND10 billion (or US$476,190) and are not listed on a stock exchange (Securities Law, 2006).

24

2 Role of Vietnam in a Changing Global Economy

Table 2.2 Summary data of the Vietnamese stock market as of 2013 and 2022 Stock exchange

No. of companies

Market capitalisation (US$ Billion)

Stock exchange

2013

2022

2013

2022 (as of October 2022)

2013 (%)

2022 (as of October 2022) (%) 56

HOSE

303

385

39.5

173.15

24

HNX

377

342

5

14.09

3

UPCoM

176

860

Total

856

1,587

1.5 47

4.56

40.05

0.5

12.96

227.29

27.5

73.52

Source HOSE, HNX

Table 2.2 shows the summary information for HOSE, HNX, and UPCoM. At the end of 2013, there were 303 companies listed on HOSE with a market capitalization of VND 842,105,000 million (US$40.10 billion). The HNX had 377 companies listed on it with a market capitalisation level of VND 106,870,618 million (US$ 5.089 billion). Commodities on UPCoM include stocks, convertible bonds of unlisted public companies, and stocks of companies delisted from the listed markets. Stocks delisted from HOSE or HNX or suspended due to losses are also moved to UPCoM for trading. Launched in June 2009 with ten initial UPCoM companies, as of the end of 2013, UPCoM hosted 176 companies with a total market capitalisation of approximately VND 38,383 billion (US$1.827million) (HNX, 2013). As of 2022, UpCoM is home to 860 public firms with the market capitalization of USD 40.05 billion. The data in 2022 shows a remarkable leap in the development of the Vietnamese stock market. Over nine years, the total market capitalisation to GDP of Vietnam has surged from 27.5 to 73.52%, transforming the stock market as an effective channel to transfer funds from fund suppliers to fund users. The advancement of the stock market as a fund transfer channel will make fund users less reliant on bank-based intermediaries. Thus, even though this ratio is much lower compared to other ASEAN peers such as Singapore, Malaysia, and Thailand, with around 192, 130, and 110%, respectively (FRED, 2022a, 2022b, 2022c), it displays a positive sign of Vietnam transitioning to a more market-based economy. Table 2.3 shows more detail in terms of the number of listed companies on both the HOSE and HNX, excluding those listed on UPCoM, and their book value of equity and market capitalisation by year until 2013, which is the time we conducted the empirical analysis for corporate governance of Vietnamese listed firms. Table 2.3 presents numbers of listed entities, equity (issued capital), and market capitalisation of both exchanges in Vietnam from 2005 to 2013, which covers a time span of our empirical research. At the time of writing this book, we also update the data for 2022. As can be seen in the table, the Vietnam stock market has increased markedly in terms of listed firms and market caps. This can be explained by the Government’s effort to develop a more transparent legal framework, such as the

2.2 Vietnam as an Emerging Market

25

Table 2.3 Number of listed firms and capitalisation of HOSE and HNX (2000–2013 and 2022) Unit: VND11 Million Hochiminh Stock Exchange (HOSE) Year

No. of listed firms

Book value of equity

Market capitalization

(VND Million)

(VND Million)

Hanoi Stock Exchange Year

No. of listed firms

Book value of equity

Market capitalization

(VND Million)

(VND Million)

2000

5

Data unavailable

986,000

2000

n/a

n/a

n/a

2001

10

Data unavailable

1,570,000

2001

n/a

n/a

n/a

2002

20

Data unavailable

2,436,000

2002

n/a

n/a

n/a

2003

21

Data unavailable

2,370,000

2003

n/a

n/a

n/a

2004

24

Data unavailable

4,237,000

2004

n/a

n/a

n/a

2005

33

1,918,000

7,390,000

2005

9

1,515,562

1,884,284

2006

108

14,061,000

147,967,000

2006

87

11,120,000

73,189,337

2007

141

38,050,000

364,425,000

2007

112

13,393,833

130,112,037

2008

163

57,395,000

169,346,000

2008

168

23,456,024

55,174,771

2009

194

104,233,000

494,072,000

2009

257

37,120,418

123,547,686

2010

275

171,827,000

591,345,000

2010

367

65,029,135

131,817,647

2011

306

202,065,000

453,783,000

2011

393

79,406,538

83,721,034

2012

308

248,501,000

678,403,000

2012

396

85,536,268

86,543,004

2013

303

269,449,000

842,105,000

2013

377

87,515,306

106,870,618

202212

385

n/a

4,069,025

2022

342

n/a

331.115.000

Source HNX, HOSE

issuance of the Securities Law in 2006 and its relevant laws and regulations, resulting in the attraction of more private and foreign investors to inject funds into the stock market. Despite yielding tremendous success in advancing the stock market capitalisation, separating the two stock markets and their independent reporting line to the State Securities Commission of Vietnam takes a lot of work to manage. As a result, the Vietnam Exchange, which consolidated both Hochiminh Stock Exchange and Hanoi Stock Exchange exchanges, came to life under Decision No. 37/2020/QD-TTg dated December 23rd, 2020, by the Prime Minister (effective from February 20th, 2021). It 11

VND is the official currency of Vietnam, for which the exchange rate was approximately VND21,000/USD in 2013. 12 The exchange rate was approximately VND23,500 as of the end of 2022.

26

2 Role of Vietnam in a Changing Global Economy

officially began operations on August 6th, 2021. The Vietnam Exchange is a parent company organised as a one-member limited liability company with 100% charter capital owned by the Government. The Vietnam Exchange, abbreviated as VNX, has a charter capital of VND 3,000 billion and holds 100% ownership of the Hochiminh Stock Exchange and Hanoi Stock Exchange.

2.2.6 GDP Growth Vietnam is a socialist-oriented market economy with a high level of government intervention. Since 1986, Vietnam has been transitioning from a centrally planned and heavily rural economy to a more industrialised and market-based one. Its GDP has grown at a rate of at least 5% per year since 2010, peaking at 7.1% in 2018.13 With such rapid economic growth, the country went from being one of the world’s poorest to comfortably middle-income. Its GDP per capita increased more than tenfold from US$230 in 1985 to US$2,786 in 2020.14 When adjusted for purchasing power, it rises to over US$6,000. Recently, breaking a general trend of slower growth internationally, the expansion of trade and foreign direct investments has helped Vietnam to record stronger economic growth. Vietnam’s GDP rose by 5.03% in Q1 of 2022 compared to the same period the previous year, according to the General Statistics Office of Vietnam.15 Additionally, Vietnam’s exports increased by 14.4% year over year to $176.35 billion in the first quarter.

2.2.7 Role of Sovereign Wealth Funds Many countries employ sovereign wealth funds to build wealth to benefit their population and their economy. A sovereign wealth fund (SWF)’s primary goals are to diversify the economy of the nation to stabilise it and to produce riches for future generations. Examples of ASEAN sovereign wealth funds are presented in Table 2.4. Some SWFs have multiple goals or have goals that evolve over time, and they share some common characteristics as investors (Curzio & Miceli, 2010). These characteristics include the fact that all SWFs are government-owned investment funds, have part of their portfolios denominated in foreign currency, are independently managed and are subject to long-term investment horizons. Government or state industrial planning, according to Dyck and Morse (2011), has significant explanatory power for the heterogeneity in SWFs’ portfolios. Additionally, SWF-led acquisitions are more likely to pursue companies with greater overall 13

World Bank & OECD. World Bank. https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=VN. 15 General Statistics Office of Vietnam. https://www.gso.gov.vn/en/homepage/. 14

2.2 Vietnam as an Emerging Market Table 2.4 ASEAN sovereign wealth funds

27

Country

Sovereign wealth fund

Assets* (billion)

Vietnam

State Capital Investment Corporation

$2.4

Indonesia

Indonesia Investment Authority

$5.56

Brunei

Sovereign Wealth Fund in Brunei

$66.3

Malaysia

Khazanah Nasional Berhad $30.5

Singapore

Temasek Holdings (Private) Limited Sentosa Development Corporation GIC Private Limited

$872.0

Source Lowy Institute Asia Power Index (2021 edition) & SWFI16

assets and less financial constraint, and they are also less likely to fail (Karolyi & Liao, 2009). World growth today is no longer driven by OECD countries but by emerging markets in Asia like China and many Latin American countries (Santiso, 2008). In 2005 the Communist Party of Vietnam established the government-owned investment fund, the State Capital Investment Corporation (SCIC), to divest the country’s state ownership, manage residual state ownership, or even invest in state-owned enterprises (SOEs). The State Capital Investment Corporation is an investment company owned by the Government of Vietnam. Incorporated in 2005 under Decisions No.151/2005/QDTTg of the Prime Minister, the SCIC started its operation in 2006 and has had a team of over 200 people (SCIC, 2016). With its board mandate, establishing the SCIC is considered a highlighted measure of the Vietnam Government in the economic and SOE reforms aimed at enhancing the efficiency of state capital utilisation. Its primary objectives are to represent the state capital interests in enterprises and invest in key sectors and essential industries in which the state holds the dominant role while respecting market rules. The SCIC is an active shareholder and investor. Its portfolio covers a broad spectrum of sectors, including financial services, energy, manufacturing, telecommunications, transportation, consumer products, health care, construction, and information technology. As of 31 December 2013, the corporation manages a portfolio of 361 firms with a book value of VND14,423 billion or US$687 million (SCIC, 2014). Recently, the SCIC is the 60th largest sovereign wealth fund, with total assets worth $2.4 billion, according to the Sovereign Wealth Fund Institute (SWFI, 2021).

16

https://power.lowyinstitute.org/data/economic-capability/international-leverage/sovereign-wea lth-funds/ & https://www.swfinstitute.org/profiles/sovereign-wealth-fund/asia accessed 19 October 2022.

28

2 Role of Vietnam in a Changing Global Economy

As an investment company, the SCIC owns and manages its assets, which means it can make business decisions relating to its portfolio with complete commercial discretion under its board’s guidance, such as investment, divestment, and business decisions to achieve maximum risk-adjusted returns over the long term. However, since the SCIC has come into existence to speed up the SOE reform, its investment philosophy is not only to attain the required return on investment but also to divest its assets in underperforming and small-scale firms, opening doors for private and foreign investors. Before the SCIC was established, state ownership had been represented by the central government authority, local authority, or economic groups/corporations. With the SCIC presence, a substantial portion of the state ownership has been transferred from the above authorities to the SCIC and then from the SCIC to private investors. Since its commencement in 2006, the SCIC has been handed responsibility over 965 companies, of which 587 companies were wholly divested. At the time we conducted our empirical study of the SCIC, its portfolio companies are categorised into three groups, specifically groups A, B, and C, of which groups A, B, and C account for 70, 19, and 11% of the entire portfolio respectively (SCIC, 2015). Group A (17 firms): Companies in this group are large-scale firms effectively operating in key industries and are in line with SCIC’s long-term investment strategy. The SCIC aims to retain its shareholdings in the group A firms and tends to expand them by seeking suitable strategic partners. Group B (80 firms): This group includes mid-sized firms with charter capital of VND10,000 billion (US$476 million equivalent) or more. These firms are inclined to generate an ROE of at least 10% annually. The SCIC adopts a flexible investment approach to this group of firms, which can include restructuring or pushing to equitise the firms through IPOs. Group C (264 firms): Small and poor performing, the remaining companies do not meet the criteria set for groups A and B; therefore, the SCIC plans to divest its holding through private sales to one or a group of investors. However, this portfolio of the SCIC does not stay unchanged as the SCIC is entitled to sell and buy shares in those firms if its initiatives comply with the relevant laws. As a shareholder, the SCIC exercises its roles and duties adhering to the Enterprise Law of Vietnam and other related regulations, including, but not limited to, exercising voting rights at the General Meeting of Shareholders and nominating members for the Board of Directors or Supervisory Board. Even though the SCIC is entitled to elect members of the Board of Directors for numerous companies under its portfolio, it is inclined to appoint its personnel to sit on the board for large-scale Group A firms and hire the current management staff in Group B and C firms to execute its directorship role on their behalf. As a state investment company, the SCIC has its own board of directors and a management team. It pays taxes to tax authorities and distributes dividends to its shareholder, the Vietnam Ministry of Finance.

2.3 Vietnam as a Global Economic Player

29

Table 2.5 Category of firms in the SCIC holdings Type of firms

Percentage of state ownership (%)

State ownership in billion VND

Number of firms

A1

> =50

> =100 billions

17

A2

> =50