Sector Switching: An Unexplored Dimension of Firm Dynamics in Developing Countries



decision. Moreover, it is equally clear that sector variation should be carefully
considered in trying to come to grips with the determinants of switching and exit given
that the introduction of province dummies in columns (3)-(4) has little effect on the
results. This confirms that industrial policies in Vietnam do indeed appear to be defined
at national and sector rather than at regional or provincial levels, in line with policy
declarations and planning documents such as MPI (2003).

Second, the results in Table 11 confirm that firms are less likely to exit and switch from
sectors that are highly dominated by SOEs as measured by the SR indicator, and SOE
domination also leads to lower probabilities for switching out relative to exiting. As
hypothesised in Section 2, economic reform may be opening up opportunities for
smaller (private) enterprises in sectors dominated by SOEs, so they start as producers of
intermediates. However, in understanding the negative exit and switching probabilities
associated with SR, it is possibly even more important to note that SOEs in Vietnam
still received preferential treatment during the period under study. Moreover, many and
well established commercial and personal links continue to exist between SOEs and
other domestic firms. The domestic enterprise system is therefore highly interlinked, or
better closely intertwined with SOEs - both in terms of input-output coefficients and
personal contacts. This is likely to lead to less movement out of this sector in terms of
exit and switching than would otherwise be the case. However, it is also clear that
reform efforts are indeed starting to make themselves felt in that exiting is more
probable than switching.

Third, the inter-twined nature of the domestic enterprise system has so far not extended
itself to include foreign owned firms. In contrast with the technology transfer argument
hypothesised in Section 2, there are in Vietnam repeated reports on limited
technological spill-over and lack of linkage from foreign to domestic firms (CIEM,
2003). Firms are attracted to and enter foreign-dominated sectors. Yet, once in, they
may find it difficult to compete due to less than expected technology transfers and
tougher competition due to the competitive advantages associated with foreign firms.
The result is that greater FR increases the probability for firms to either exit or switch
sector. Moreover, and in contrast with what was noted for the SOE sector variable,
foreign domination in terms of output share leads to switching being more likely than

21



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