Capital Market Distortions in Vietnam: Comparing SOEs and Private Firms

Abstract

Financial constraints are expected to be severe in Vietnam, especially for private firms, but there is limited quantitative evidence for the size of financial constraints experienced by SOEs and private firms and the resulting efficiency losses. This paper investigates the size of the capital market distortions using a model of establishment dynamics allowing for different collateral constraints experienced by SOEs and private firms. The parameterized model consistent with the key features of the manufacturing panel census (2000-2009) implies that firms in Vietnam face severe collateral constraints, more so for private firms. I also find capital distortions across ownership types are a quantitatively important misallocation channel. The resulting TFP losses are large and robust (ranging from 11.5%-19.1% of GDP). This adds extra evidence to the controversy in the literature about the importance of financial frictions in generating TFP losses.

Keywords: Financial Constraint, Capital Market Distortion, Misallocation, TFP Loss

JEL Classification: C00, D24, D61, G28, G32