Impact of Investment Climate on Total Factor Productivity of Manufacturing Firms in Vietnam

Giang, Mai Huong; Xuan, Tran Dang; Trung, Bui Huy; Que, Mai Thanh; Yoshida, Yuichiro

Impact of Investment Climate on Total Factor Productivity of Manufacturing Firms in Vietnam

2018

Giang, Mai Huong | Xuan, Tran Dang | Trung, Bui Huy | Que, Mai Thanh | Yoshida, Yuichiro

Investment climate has been acknowledged as a key factor that significantly influences economic performance. Improving the investment climate may foster the development of the private sector by creating sustainable jobs and opportunities for entrepreneurs, which contributes to sustained poverty reduction in developing countries. This research examined the relationship between the investment climate and firm productivity by exploring a unique panel dataset of 1310 enterprises operating in the manufacturing sector in Vietnam. Productivity was measured as the total factor productivity (TFP) obtained by production function estimation using Levinsohn and Petrin’s approach. Investment climate factors included infrastructure, labor skills, regulatory governance and institutions, and access to finance. It was shown that restrictions on the investment climate were harmful to firm productivity. The lack of Internet and financial accessibility, low educational level of employees, administrative burden and the cost of bribery were negatively associated with firm TFP. The results indicate that access to Internet and finance, and quality of labor should be further enhanced while administrative burden and corruption should be significantly reduced to strengthen the TFP. The findings of this study may provide insights for policymakers who aim to improve the investment climate and firm productivity and thereby contribute to the sustainable growth of the country.

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