Residual State Ownership and Firm Performance: A Case of Vietnam

Abstract

Privatization has played an important role in national economic reform in Vietnam. However, unlike other transitional countries in Central and Eastern Europe, Vietnam has chosen a partial and gradual privatization where the government still holds significant ownership in most privatized firms. Whether partial privatization can enhance privatized firms’ performance or full privatization should have been implemented is a critical question that needs to be answered. This paper utilizes semiparametric regressions to study the relationship between residual state ownership and firm performance. The results indicate an inverted U relationship between state ownership and firm performance. We show that the performance of privatized firms improves with an increase in the level of state ownership until around 40%, after which the effect of state ownership on firm performance tends to decline. This demonstrates that in a transitional context, relinquishing governmental control via privatization can significantly benefit privatized firm performance. However, further reduction of state ownership may decrease the performance of privatized firms. Overall, the study contributes significantly to the growing body of evidence on the nonlinear effects of state ownership. This suggests that in the transitional context of Vietnam, due to weak corporate governance and limited protection of minority shareholders, there could be a temporary optimal position where state and private investors hold balanced ownership to simultaneously supervise operations and promote the performance of privatized firms.

The Nexus between Corporate Performance and State Ownership in Vietnam: Evidence of State Ownership’s Inverted U-Shape and Provincial Business Environment Influences

“…Our investigation underscores the linkage between advancements in local governance quality and the simultaneous improvement in corporate performance. Our findings are entirely consistent with institutional theory, emphasizing that the amelioration of the business environment contributes to better asset protection, diminished information asymmetry, and reduced risks, corruption, and costs for businesses (Nguyen and Vo 2022;Nguyen and Wong 2021;Nguyen et al 2020.…”

“…In the case of Vietnam, most research has attested to the main context of privatization by comparing firm performance before and after the privatization process (Nguyen and Vo 2022). However, investigations examining the impact of residual state ownership in partially privatized enterprises within the Vietnamese setting are scarce and yield varying outcomes Vu and Pratoomsuwan 2019;Suu et al 2021).…”

“…The unique historical backdrop positions Vietnam as an ideal case study for examining the role of state ownership. Despite a notable decline in state ownership following the 1986 reform's equitization, the enduring impact of state ownership has remained pronounced in recent times (Nguyen and Wong 2021;Nguyen and Vo 2022). Furthermore, Vietnam's market could be classified as developing, characterized by partial opacity and insufficient corporate governance, as Vo (2018) and highlighted.…”