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  1. Understanding Firm-level Corruption in VietnamByJohn RandMay 2009Web: www.econ.ku.dk/randEmail: john.rand@econ.ku.dk

  2. Introduction CIEM/ILSSA/IPSARD/Danida collaboration Business Sector Program Support (BSPS) – Component 5: Business Sector Research 2 Rural household surveys (2006, 2008) 3 SME surveys (2005, 2007, 2009) Previous surveys (1991, 1997, 2002) SME definition (WB and Vietnamese government definition) Micro: up to 10 employees (total assets up to 100,000 US$) Small: up to 50 employees (total assets up to 3 mill US$) Medium: up to 300 employees (total assets up to 15 mill US$)

  3. Provinces Covered • Round 5 in the SME tracer survey. • Expanded over time: • 1991: Ha Noi, Hai Phong and HCMC. • 1997: Ha Tay and Long An added. • 2002: Phu Tho and Quang Nam added. • 2005: Nghe An, Khanh Hoa and Lam Dong added. • 2007: Same as in 2005 • Total: 10 provinces – over 2,635 firms available for analysis. Ha Noi Phu Tho Ha Tay Hai Phong Nghe An Quang Nam Khanh Hoa Long An Lam Dong HCMC

  4. Sampling • Population of firms: • Establishment Census 2002, GSO (2004) • Enterprise Survey/Census various years, GSO (2008) • Problem: Informal firms • Sampling done in three steps: • In 2005 the number of firms interviewed done proportionally to the number of registered enterprises in each province. Some adjustments. • In 2007 trace surviving firm and replace exit firms with new enterprises within same province and legal ownership form. • Result: Formal HH firms under-represented. HH firm segment consists both of informal and formal (business registration license obtained at the district level)

  5. Questionnaire • Consists of 4 parts: • Main questionnaire (covering both new entries and ”repeat” enterprises) • Employee questionnaire (covering a sample of the interviewed enterprises) • Exit questionnaire (track down owner of closed enterprises; making sure that the firm is actually closed down and not just changed location) • Economic Accounts/Financial records

  6. Questionnaire details and focus • Identification particulars • General characteristics • Enterprise history • Household characteristics of the owner/manager • Production characteristics • Sales structure and export • Indirect costs, raw materials and services • Fees, taxes and informal payments • Employment • Investments, assets, liabilities and credit • Networks • Economic environment, constraints and potentials

  7. Number of Interviewed Firms

  8. Province and Legal Ownership Form (2007)

  9. Focus - Informal Payments • Bribe – Informal payment going from firms to public officials. • How to ask about bribes/informal payments/corruption? • Use data from 2005 and 2007 • Consider only the balanced panel • Thorough data cleaning • Only reasonable and time-consistent financial data • No missing values for relevant variables • Left with 1,661 firm level observations each year • Total of 3,322 observations for analysis. • ICA (2005) – Two-thirds provide informal payments (However, relatively large incumbent firms considered) • PCI 2008 – Informal payments remain one of the major doing business obstacles in Vietnam.

  10. Bribe Incidence: Transition Matrix ”Bribe Switchers”

  11. Bribe Purpose Identification

  12. Bribe size Increase from 0.5 to 0.6 between 2005 and 2007

  13. What Explains Bribe Incidence • Exposure / Visibility • Sunk costs / Bargaining Power • Willingness / Ability to Pay • Degree of Interaction with Public Officials • Note: Different policy recommendations on how to reduce informal payments depending on which explanation(s) dominates.

  14. Summary Statistics 130 mill. VND 15 mill. VND

  15. Traditional Determinants

  16. Interaction with Public Officials ???

  17. Firm Growth and Bribes No ”Efficient Grease” – But performance punishment. (Effect only possible to identify with panel data)

  18. Interaction Indicators and Growth Firms becoming formal experience increased revenue growth! But classical causality problem? (i) Are well performing informal firms more likely to be noticed and forced into formality or (ii) Is formality the reason for the increased performance (due to better access to credit, government assistance etc.)

  19. Conclusion • Analysis of the determinants of bribe incidence covering 1,661 SMEs in Vietnam over two years. • Visibility (size, formality, etc.), sunk costs and bargaining position (capital/labour ratio, diversification, etc.), ability to pay (profitability, revenue growth, etc.) and the level of interaction with public officials (inspections, assistance etc.) affect the probability of having to provide a bribe. • Visibility effects are found to dominate the “bribes-to-hide” effect. • Several features in the data that support the ability-to-pay hypothesis, and we find evidence suggesting that corrupt public officials “punish” well performing firms. • Whether this effect is a result of public officials charging an “informal service fee” for delivering beneficial assistance to these well performing firms still remains to be explored.