Networking in Weak Institutions: When Is It Good for Small Business Investment? The Case of Vietnam

Abstract

This study investigates the influence of business-specific, bank-specific, and political-specific networks on small firm investments in Vietnam. Also, we aim to explain how these social networks substitute the weaknesses of local institutions. Examining a set of more than 9,800 firm-year observations of small businesses in Vietnam from 2005-2015, we find that social ties with bank officials can boost firm investments; social ties with government officials can help firms overcome institutional voids; whereas social ties with businesspeople appear trivial to investment decisions. More importantly, we propose that networking, especially networks built upon connections with government officials can substitute local institutions by addressing the weaknesses in (1) inefficient legal enforcement, (2) corruption, (3) bureaucratic compliance, and (4) non-transparent governance system.