recently, foreign and domestic investors were governed by two separate laws: the Law
of Foreign Investment and the Law of Domestic Investment.5 Although the 1999
Enterprise Law aimed at leveling the playing field for domestic and multinational firms,
foreign investment has generally been directed towards special sub-sectors selected by
the Vietnamese authorities.6 Capital shortage and technological spillover arguments
motivated the introduction of preferential treatment of foreign-owned firms in the late
1990s, and following the Chinese model, special economic zones were created. While
we expect foreign enterprises to be less prone to switch sector, these special
arrangements make it less likely for foreign firms to shut down.
Bernard et al. (2006a) propose that aside from firm-specific characteristics, firm exit
and sector switching are also driven by sector-specific characteristics which are
common to all firms in a given sector. Examples include sudden shifts in consumer
preferences affecting demand, supply shocks driven by changes in sector structure due
to policy reform, new or refined production technologies and trade liberalization. All of
these events affect product profitability and are thus likely to affect firm allocation
decisions. We consider five such sector specific “push” and “pull” factors in what
follows.
First, we expect that the dominance of state enterprises (SR) (state owned enterprise
share of total sector output) plays a role in affecting exit and switching decisions.
Preferential treatment of SOEs makes it difficult for non-state enterprises to compete
and may force more efficient non-state firms to exit (or decide not to enter highly SOE
concentrated industries). At the same time, during the ongoing transition from a
planning to a market economy the SOE share of material inputs bought at market
conditions may, as suggested by Jefferson and Rawski (1994) in the case of China,
increase the attractiveness of highly SOE concentrated industries for smaller (private)
5 A new Investment Law came into effect in July 2006 (CIEM, 2006). This law aims at equalizing
opportunities for domestic and foreign investors. However, as outlined in Freshfields Bruchhaus Deringer
(2006), a truly common framework has not yet been achieved in all areas.
6 Thuyet (1995) documents the Vietnamese government’s approach to foreign investment, which includes
a list of five broad sub-sectors where foreign investors are encouraged to conduct business. The five
broad sub-sectors are: (1) large scale industries (with a focus on export-oriented and import substitution
industries), (2) high-technology industries, (3) labour intensive industries using raw materials and natural
resources available in Vietnam, (4) construction of infrastructure, and (5) foreign-exchange-earning
service industries.