Financial Constraints, Local Governance and Small Firm Performance: Evidence From Vietnam

Abstract

Young and small firms are vulnerable to external environments because of their age and size liabilities. Specifically, the lack of external finance and the poor governance quality of local governments are the two important determinants of local entrepreneurship. This thesis aims to contribute to the understanding of the relationship between financial constraints, local governance and local entrepreneurship in weak institutional and underdeveloped financial environments. Employing the census data of small and medium sized enterprises (SMEs) from Vietnam, this thesis is comprised of three empirical studies examining young and small firm investment and performance. The first empirical study investigates firm financing strategy. It aims to explore how firms make use of external financing sources for new investments. This study stresses that entrepreneurs’ self-finance and bank loans are the two most important external financing sources for SMEs in emerging countries. In addition, it proposes that financial constraints is an important factor that determines to what extent firms make use of entrepreneurs’ self-finance and bank loans. The second empirical study investigates the influence of local governance arrangements on local young and small firm investments. It provides evidence to highlight the importance of local formal and informal governance forces to local SME investments. In addition, it particularly examines the linkage between firm-level financial constraints and governance effects. Its finding indicates that the effects of local governance on firm investments vary significantly depending on degrees of firm-level financial constraints. The third empirical study extends the discussion to the effects of local governance on firm growth performance. Particularly, it investigates the relationship between informal governance forces (unofficial policies) and local firm growth performance. It proposes that local governance is important not only to firm investments but also to firm performance. In addition to local governance, this chapter also analyses a higher-level institution – the pro-entrepreneurial culture in relation with local firm growth performance.