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INTRODUCTION

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- Examining the effects of factors on misallocation and reallocation of resources in Vietnam's
manufacturing firms

1. The reason for choosing the thesis
The question of why some countries are richer than others and some poor countries become richer
after a few decades has extensively been investigated by economist for a long time. Initially to answer this
question, Solow (1957) indicates the growth of national output is attributed to the growth rate of factors of
production (capital and labor) and technological change (later known as total factor productivity-TFP).
According to Solow, differences in TFP are found to be the main source of cross-country difference in per
capita income (Klenow and Rodriguez-Clare, 1997; Hall and Jones, 1999; Caselli, 2005). However, what
determines these differences in TFPs among rich and poor countries? Recently, a new approach has
highlighted the role of resource misallocation arising from various distortions in input and output markets
across heterogeneous firms could cause difference in TFP (Hsieh and Klenow, 2009). A recent approach,
typical of Hsieh and Klenow (2009), shows that aggregate TFP may be low because of misallocation of
resources among heterogeneous production units.
Together with the existence of misallocation of resources explaining the differences in aggregate
productivity across countries, the process of resource reallocation among entering, exiting and surviving

firms plays a very important role in explaining a country's aggregate productivity growth and potential
growth. In addition to misallocation of resources, a new aspect of research in the world is to consider
whether aggregate productivity growth also comes from reallocation of resources (capital and labor)
among entering and exiting firms or not besides the main contribution from the firm's own productivity
growth (Olley and Pakes, 1996; Melitz and Polanec, 2015; Restuccia and Rogerson, 2008).
Productivity growth is an issue that all countries, especially developing countries are interested in,
including Vietnam. Current research papers on productivity growth in Vietnam do not fully reflect
productivity growth potential among firms, especially manufacturing firms which contribute mainly to
gross domestic product. If misallocation and reallocation of resources are studied abroad to explain
productivity growth potential from the early 1990s, the current studies in Vietnam on misallocation and
reallocation of resource are still very limited. Drawing from the above reasons, the thesis "Misallocation,
reallocation of resources and productivity growth in Vietnamese manufacturing fimrs" is choosen for
researching. This thesis will effectively complement current Vietnamese studies on misallocation and
reallocation of resources then provide appropriate policies to minimize misallocation of resources for
industries and select economic areas with development advantages.
2. Objectives of the research


General objective:

The overall objective of the thesis is to provide a theoretical framework to clarify the level of
misallocation of resources and the process of resource reallocation changing the aggregate productivity of
Vietnamese manufacturing firms. Since then, the thesis proposes solutions to minimize misallocation of
resources and promote reallocation of resources towards productivity growth.


Specific objectives

- Evaluating the status of misallocation of resources and reallocation of resources that change the
aggregate productivity in Vietnam's manufacturing sector in the period 2000-2015

- Providing suitable solutions in the context of Vietnam economy in order to reduce misallocation of
resources and promote the process of resource reallocation towards aggregate productivity growth.
3. Subject and Scope of the research
3.1 Research subject
Misallocation of resources, reallocation of resources and productivity growth in Vietnamese manufacturing
firms
3.2 Limit the scope of the research
Scope of the research: Vietnamese manufacturing firms from annual Enterprise Survey collected by General
Statistics Office of Vietnam (GSO) since 2000


Time: secondary data collected from 2000 to 2015
4. The structure of the thesis
In addition to the introduction, conclusion, list of tables and references, the thesis content consists of
5 chapters:
Chapter 1: Overview of studies on misallocation and reallocation of resources
Chapter 2: Theoretical framework about the relationship among misallocation and reallocation of
resources to productivity growth
Chapter 3: Research methodology about factors affecting the misallocation and reallocation of
resources in Vietnamese manufacturing firms
Chapter 4: The status of misallocation and reallocation of resources in Vietnamese manufacturing
sector in the period 2000-2015
Chapter 5: Policy recommendations for reducing misallocation of resources and promoting
reallocation of resources among firms toward aggregate productivity growth

CHAPTER 1: OVERVIEW OF STUDIES ON MISALLOCATION AND REALLOCATION OF
RESOURCES
1.1 Overview of international studies related to the thesis

1.1.1 The international studies on misallocation of resources
The role of misallocation has been analyzed and emphasized from the research of Restuccia and
Rogerson (2008), Hsieh and Klenow (2009), and Bartelsman et al. (2013). The researchers suggest that the
misallocation of resources among countries creates a TFP gap between rich and poor countries. Initially, the
reasons for misallocation of resources are distortion of policies such as tax burden (production tax and
capital tax) or subsidies, market power and inefficiency of financial markets which make firms feel difficulty
to access the capital to expand their business and allow inefficient companies to exist in the same market.
Laterly, the causes of misallocation of resources include high interest rates, adjustment cost, fixed and


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sinking cost, trade barriers, markups and credit market deficiencies. Eliminating such distortions can bring
significant benefits to the economy.

CHAPTER 2: THEORITICAL FRAMEWORK

1.1.2 The international studies on reallocation of resources

2.1 Misallocation of resources

If misallocation plays an important role in differentiating per capita income across countries,
reallocation of resources among production units plays a critical role in explaining productivity growth
growth. In addition to the firm's own productivity contribution, the recent approach is to consider the
productivity growth also comes from the reallocation of resources (capital, labor, market share) among
entering and suriving firms with high productivity and exiting firms with low productivity. The entry of new
firms makes the low-productivity firms exit and the surviving firms must strive to innovate, improve
productivity to survive and compete with new competitors in the industry (Jovanovich, 1982; Foster et al.,
2001; Saso Polanec, 2004; Foster et al., 2005).

2.1.1 The concept and theory about misallocation of resources

1.1.3. Dynamic productivity model in reallocation efficiency analysis
Most of the models used to analyze reallocation of resources mainly focus on static models but not
dynamic models. The static model does not separate the specific contribution of firm-level productivity
change from entering, exiting and surviving frims. The decomposition of dynamic model directly links
components that measure aggregate productivity changes within the framework of heterogeneous firms. The
typical studies for dynamic productivity models include Olley and Pakes (1996); Griliches and Regev
(1995); Fortes, Haltiwanger and Krizan (2001); Melitz et al. (2015).
1.2 Overview of national studies related to the thesis
1.2.1 The studies on misallocation, reallocation of resources and productivity growth in Vietnam
Previous studies have looked at the role of misallocation and reallocation of resources on
productivity growth quite comprehensively, but mostly in developed economies. In fact, not many studies
have looked at this issue in the context of an emerging and transitional economy like Vietnam. These
developing countries often have high level of resource misallocation and experience high rates of entry and
exit (high reallocation of capital) because of economic reforms and removal of growth constraints (Thang
Bach, 2013; Fujin Zhou, 2014; Doan Thi Thanh Ha and Kozo Kiyota, 2015).
1.2.2 The issues of the thesis have not been solved by previous studies
Firstly, domestic and foreign studies do not yet have a systematic assessment of the causes of
misallocation of resources. Secondly, the models using to analyze reallocation of resources mainly are static
models but not dynamic models. Thirdly, quantitative research on misallocation of resources in Vietnam has
focused research only on the manufacturing sector but not on a smaller level. Fourthly, there has been no
research to investigate the effects of misallocation on the reallocation of resources among firms in Vietnam
and over the world. Finally, policies for reducing the misallocation of resources as well as reallocating
resources towards productivity growth have not been specifically and systematically proposed.

In economics, resource allocation is the allocation of production factors in the economy for different
uses based on market demand. Resources are effectively allocated when the proportion of inputs used to
produce goods and services accurately reflects their relative costs so as to minimize production costs.
Meanwhile, output of goods and services accurately reflect consumer preferences for different types of goods
and services. In the context of the whole economy, resources can be allocated by many different means, such
as markets or plans. However, if the allocation of resources such as capital, skilled labor, machinery and
equipment, etc does not follow the appropriate ratio among firms or industries in the economy, it may lead to
misallocation of resources. Misallocation of resources (also known as misallocation) is understood that
production inputs such as capital and labor are not allocated in such a way that output can be reached to the
maximum with the available resources. When the government intervenes and changes the ratio of production
inputs according to policies or due to market failures and asymmetric information, these resources will be
misallocated, which leads to less efficient production.
2.1.2. The causes of resource misallocation
2.1.1.1. Distortions of input and output prices
Banking system may offer preferential interest rates for loans leading to misallocation of credit
across firms. Young firms may face higher capital costs than older firms. This is evidence of the presence of
financial institutions’ credit constraints on young businesses due to unguaranteed credit history. Output
distortions can be caused by government subsidy of specific producers, special tax incentives, or lucrative
contracts to promote large scale producers or the limits on the size of firms due to not expanding the market,
so output good is less commercial (Hsieh and Klenow, 2009; Guner et al., 2008; Restuccia and Rogerson,
2008).
2.1.1.2. Adjustment costs
In practice, firms face the cost of capital adjustment for production activities and are hit by
idiosyncratic productivity shocks. In such a framework, dispersion will arise naturally in the marginal revenue
product of capital and cause misallocation of resources (Asker et al., 2014; Bartelsman et al, 2013; Song and
Wu, 2013).
2.1.1.3 Trade barriers and firm-specific markups
Imperfect competition takes place in almost all areas of economic activity. When companies have
monopoly power and set firm-specific markups for their firms, the imperfect market with firm-specific markup has
also been proposed as a misallocation source (Syverson, 2004a).
2.1.1.4. Financial frictions
The presence of financial frictions is considered as a third potential source of misallocation. Due to
the financial market failure that limits young businesses, these businesses do not develop because they have
no basis to guarantee access to credit equally. Financial institutions may or may not be willing to provide


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credit for highly productive firms but small-scale or young firms, preventing them from extending their
operations (Banerjee and Duflo, 2005; Caselli, 2005; Midrigan and Xu, 2010).
2.1.1.5. Corruption
Corruption knows as the abuse of position, authority, or duty assigned for private gain will weaken the
positive effects of competition in the market because ineffective firms can bribe, then they will be more
favourable than those of other firms. By extension, the corruption will make the economy deviate away optimal
structure for growth. Firms with political connections can be facilitated through many channels including lowinterest special loans, tax breaks, subsidies and measures to reduce competition from competitors. (Camacho
and Conover, 2010; Ahmad, 2011).
2.1.3 The measurement of resource misallocation
The method used to quantify misallocation of resources in Vietnamese manufacturing sector is
applied according to the approach of Hsieh and Klenow (2009). For measurement of resource misallocation,
Hsieh and Klenow (2009) make a distinction between total factor productivity using real output (TFPQ), and
total factor productivity using total revenue of the firm (TFPR):

TFPQsi = Asi =

To consider the reallocation of resources that change aggregate productivity, the thesis uses OlleyPakes (1996) dynamic productivity decomposition method to examine the contribution of entering, surviving
and exiting firms to aggregate productivity.
2.3.2.1 TFP estimation
To estimate TFP, we use the semi-parametric estimation method of Levinsohn and Petrin (2003).
Total factor productivity (TFP) is calculated using the following equation:

(

TFPit = exp vait − βˆk kit − βˆl lit

)

2.3.2.2 Olley-Pakes (1996) dynamic productivity decomposition method for entering, exiting and surviving
firms
The change in aggregate productivity over time is defined as follows (from t=1 when the exit
happens to t=2 when the entry happens):

∆Φ = (Φ S 2 − Φ S 1 ) + sE 2 (Φ E 2 − Φ S 2 ) + s X 1 (Φ S 1 − Φ X 1 )

Ysi
K si (wLsi )1−α s

TFPRsi = Psi Asi =

2.3.2 The measurement of resource reallocation

= ∆ ϕS + ∆ cov S + s E 2 (Φ E 2 − Φ S2 ) + s X1 (Φ S1 − Φ X1 )

αs

CHAPTER 3: RESEARCH METHODOLOGY

PsiYsi
K siα s (wLsi )1−α s

3.1 Data

The dispersion of TFP presents misallocation and it is defined as the deviation of TFPR and TFPQ
from its mean, log(TFPR si / TFPRs ) and log(TFPQsi .M s1/(σ −1) / TFPQs ) . The magnitude of the effect of
misallocation of resources on aggregate factor productivity is shown in the following equation:
θs

θs
σ −1 σ −1
S 
S  Ms 
TFPs 
Asi TFPRs  
Y
= ∏
 = ∏∑
 

Y * s =1  TFPQs 
s =1  i =1  AsTFPRsi 



where Y* is an effective output, corresponding to an effective TFP. To consider the gains of TFP
from eliminating misallocation of resources, we have:

Y * 
− 1 *100
%TFPgain = 
 Y

2.3 Reallocation of resources
2.3.1 The concept
Reallocation of resources is the way in which production resources are redistributed among
manufacturers and goods and services are allocated to consumers. In the event of reallocation of resources in
the industry, capital and labor will move from one firm to another and lead to the entry of new productive
firms, the survival of well-performing firm as well as the exit of low productivity firms. Under this
mechanism, aggregate productivity of the economy will tend to increase.

To calculate the dispersion, Hsieh and Klenow (2009) assume elasticity of substitution σ by 3 and R
by 10%. The study also uses output elasticity of capital and labor in the US as a benchmark with assuming
the absence of misallocation in US economy. The data is taken from the National Bureau of Economic
Research's NBER-CES industry database from 2000 to 2011. In addition, the thesis uses the average Most
Favoured Nation (MFN) rate of the manufacturing sector from World Bank data and Vietnam provincial
governance and public administration performance index (PAPI).
3.2 Steps to conduct the research
Step 1: Reading and researching the General Statistics Office annual survey of enterprises from 2000 to 2015
Step 2: Retaining the necessary indicators for the study and eliminating firms with unreasonable information
such as the number of employees or capital less than zero, interrupted apperance during the study period. The
annual data is then appended together from 2000 to 2015
Step 3: Estimating Total Factor Productivity (TFP) by semi-parametric method of Levinsohn and Petrin
(2003).
Step 4: Connecting the annual enterprise survey dataset with US output elasticity of capital and labor as a
benchmark with assuming an effective US economy. This data is taken from the industry database of the
National Bureau of Economic Research (NBER - CES) from 2000 to 2011. These data will be used to
calculate the misallocation of resources and the gains of total factor productivity in case the economy has no
misallocation of resources
Step 5: The data of average Most Favoured Nation (MFN) rate of the manufacturing sector from World Bank
data and Vietnam provincial governance and public administration performance index (PAPI). continues to
be added into the full data set in step 4. From there, the thesis examines the effect of factors on the level of
resources misallocation in Vietnamese manufacturing firms.


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Step 6: Assess the process of resource reallocation by the dynamic productivity decomposition method of
Olley and Pakes (1996) from entering, exiting and surviving firms.
Step 7: Heckman selection model will be used to investigate the effect of factors on reallocation of resources
through the entry and exit of firms

TGist: Technology gap is measured as the distance to the productivity frontier and defined as total factor
productivity of firm in the industry is divided by the highest total factor productivity in industry
FDist: Financial development of firm i in industry s is measured by capital on total assets.
KList: Capital intensity is measured by capital stock per employee

3.3 The effect of factors on misallocation of resources
Lcist: human capital is calculated by total wages and training costs per employee.
SD(TFPR)st= α0 +α1* Tariffratet + α2*Liquidityratiost + α3 *vng+ α4 *lnSizest+ α5*HHIst+
α6SOEsharest+ α7Corruptt+ ηs+ηs*t+ɛt

Scaleist: Company size is calculated by the total of employees of firms

SD(TFPR)st : the dispersion of TFPR in the industry s in the year t, representing misallocation

Ageist: Age of firm

Tariffratet: The average MFN rate of the industry s is derived from World Bank data

Herfst: industrial concentration is measured by the Herfindahl index for firms

Liquidityratiost: The liquidity ratio is calculated as the ratio of short-term assets to total assets

Gst: the growth rate of industry s in year t.

Vngist: external capital that the firms must borrow from outside and determined by one minus the ratio of
firm’s equity over total capital.

Horst: The horizontal spillover variable captures the level of foreign presence in the industry

HHIst: Herfindahl–Hirschman index is a measure of market concentration and is calculated by the proportion
of firms with the largest revenue to the total turnover of the industry.
Sizest: the number of employees represented by the size of the industry

∑ FS
∑Y

ist

H orst =

Yist

i∈ s

ist

i∈ s

Backst: The backward spillover variable captures the extent of potential contracts between domestic
suppliers in the industry and foreign customers

SOEsharest: the value added share of state-owned enterprises (SOEs) in the industry
Corruptt: the index of corrupt control taken from the Vietnam provincial governance and public
administration performance index (PAPI)
ηs: unobserved industry fixed effect
ηs*t: the industry-specific time trend

Backst = ∑ ask Horizontalkt
k ≠s

Forst: The forward spillover indicates the extent of potential contracts between foreign suppliers and
domestic customers in the industry

Forst =

∑a

sl

Horizontallt

1,1≠ s

εst: an error term
3.4 The effect of factors on remisallocation of resources through the entry and exit of firms

CHAPTER 4: THE STATUS OF MISALLOCATION AND REALLOCATION OF RESOURCES IN
VIETNAMESE MANUFACTURING SECTOR IN THE PERIOD 2000-2015

Yist = f ( M is st , D t , Tit , liquidity st , T G ist , F D ist , K List , L c ist
Scaleist , A geist , H erf st , G st , H orst , B ack st , Forst , ε ist )
Z ist = f ( M is st , D t , Tit , liquidity st , TG ist , F D ist , K L ist , Lc ist
Scaleist , A geist , H erf st , G st , H orst , B ack st , Forst , µ ist )

4.1 Descriptive statistics of Vietnamese manufacturing sector
Yist is a binary variable that takes the

value of 0 if firm i leaves the industry s during year t and 1 if firm i enter in the industry s
Zịst is the profit of firm i in industry s in year t. εịst and µịst are random variables that capture the effect of
omitted variables
The independent variables include:
Misst: the level of resources misallocation in the industry s over the years
Dt: dummy variable (the value is equal to 1 since Vietnam joining the World Trade Organization WTO in
2007 and 0 otherwise).
Tit: tax policy measures Vietnam's corporate income tax over the years and is calculated according to the
turnover rate of the enterprise.
Liquidityratiost: The liquidity ratio is calculated as the ratio of short-term assets to total assets

[Table 4.1]
Over the period under study, the average size of the firm, as measured by the size of its labor force is
largest for survivors (about 534 workers per firm), followed by entrants (about 459 workers per firm). The
smallest average size is exiters (about 177 workers per firm). The result also shows that the average added
value of entering firms is higher than the added value of surviving firms and is 3 times higher than the added
value of exiting firms. The average profitability of surviving, entering and exiting firms also shows similar
results during the research period.
4.2 Misallocation of resources in Vietnamese manufacturing sector
4.2.1 The level of resource misallocation during the period 2000-2015

[Table 4.3]


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Table 4.3 indicates that the standard deviation of TFPR in Vietnam for the whole period of 20002015 is 0.80, while that of Thailand in 2006 (0.85); China during 1998-2005 (0.68); India during 1987-1994
(0.68); Japan from 1981 to 2008 (0.55) and the United States from 1977 to 1997 (0.45).

aggregate productivity is increased by 2 times from 38.117 to 73.286 due to resource reallocation towards
firms with higher productivity.

4.2.2 The efficiency gains in TFP from eliminating resource misallocation

4.4.1 Empirical results about the effects of factors on misallocation of resources

4.4 Empirical results assess the effects of factors on misallocation and reallocation of resources

[Table 4.6]

[Table 4.20]

If Vietnam follows the assumption of moving to "US efficiency”, TFP gain in whole sample of
Vietnamese manufacturing sector (81.2%) is higher than those for Thailand (73.40%); China (39.2%); India
(46.93%) and Japan (3.02%)

By Hausman test, the results from Table 4.20 specify panel data model with fixed effects (FE). Firstly,
the coefficients of tariff rate MFN and corrupt variables are positive and statistically significant indicating
that high tax rates and negative consequences of corruption increase the misallocation of resources.
Secondly, although liquidity ratio variable is only statistically significant in the random effect model, the
negative coefficient of this variable and firm size indicates that when a firm has a better liquidity ratio and
larger scale will reduce misallocation of resources. Thirdly, the negative coefficient of capital ratio that firms
borrow from outside shows that if firms can easily access external capital, the capital market is efficient and
the level misallocation of resources in the industry is low. Finally, the coefficient of HHI variable
(controlling the market structure) is positive and statistically significant. Due to market power of firms
accounting for a large proportion of the total revenue of the industry, they will cause large distortions on
inputs and outputs that lead misallocation of resources in the industry at high level.

4.2.3 Misallocation of resources by geographical areas of Vietnam

[Table 4.8]
From the dispersion of TFPR and TFPQ in Table 4.8, it is found that misallocation of resources due
to distortions is highest in the Central Highlands and Mekong River Delta and smallest in the North Central
and Central Coast.
4.2.4 Misallocation of resources by economic sectors and technological level of Vietnamese
manufacturing firms

[Table 4.10]
The results indicate that sub-samples of SOEs and low technology have highest level of resource
misallocation and that gains in TFP are highest when eliminating misallocation. Meanwhile, the lowest level
of resource misallocation and gains in TFP are foreign direct investment (FDI) and high technology firms.
4.2.5 Misallocation of resources by scale of Vietnamese manufacturing firms

[Table 4.11]
The result from Table 4.11 indicates that misallocation of resources and the gains in TFP if
eliminating the misallocation in SMEs are larger than the large-scale enterprises and equivalent to the general
sample of the entire manufacturing sector.
4.2.6 Misallocation of resources by industries
Industries dividing by technology level include low technology, medium technology and high technology.
Industries which have highest misallocation and gains in TFP mainly come from low and medium
technology industries such as products from rubber and plastics; textile; basic chemicals, fertilizers and
nitrogen compounds; rubber and plastics products; wood products; basic metals; food and beverage
production; refined petroleum products and nuclear fuel; ship and boat building.
4.3 The contribution of entering, exiting and surviving firms to aggregate productivity

[Table 4.12]
The result reveals the contribution to aggregate productivity change is highest for survivors, followed by
entrants and exiters.

[Table 4.16] and [Table 4.17]
The productivity decomposition shows the positive contribution of exiting, entering and surviving firms to
aggregate productivity change. Meanwhile, the change in the aggregate productivity is driven mainly by
change in productivity among the surviving and entering firms because exiting firms have lower productivity
(ΦX1) than the surviving firms (ΦS1) and entering firms in all years. Over 16 year from 2000 – 2015, the

4.4.2 Empirical results about the effects of factors on reallocation of resources

[Table 4.22]
The coefficient of misallocation of resources (Mis) is negative and statistically significant in all
samples involving the decision of entry and exit, which reflects the higher level of misallocation of
resources, the lower the probability for new entrants into the industry and the higher probability exiting of
active firms. Although there is no statistically significant effect on profitability, higher misallocation level
tends to reduce the profitability of operating firms. The research result shows that the entry or exit decision
and profit of firms are also affected by firm- and industry- level factors.

CHAPTER 5: PROPOSED SOLUTIONS TO REDUCE MISALLOCATION AND PROMOTE
REALLOCATION OF RESOURCES TOWARDS PRODUCTIVITY GROWTH
5.1 The content and and requirements to reduce misallocation to improve productivity growth
In a market economy, the allocation of resources is governed by many relationships from the state
management entities and market mechanism. The State and the market have become two forces together for
the purpose of rational allocation of resources and socio-economic development. The allocation of resources
such as labor, income, inputs, etc must comply with market rules and government regulations. However, in
the current economy of Vietnam, the allocation of resources is still inadequate due to the lack of proper
awareness and right actions in dealing with state-market relations.
5.2. Policy recommendations to reduce misallocation and promote reallocation of resources towards
productivity growth
5.2.1 Solutions for the Government and regulatory agencies
To encourage productivity growth and reduce misallocation of resources in Vietnamese
manufacturing sector, the government needs to remove financial barriers, input and output distortions; reduce


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adjustment costs; enhance business environment and improve the importance of international trade. The
regulatory agencies should continue supporting investment in infrastructure, simplifying administrative
procedures and improving credit and business markets so that new firms can join and develop in the market.
At the same time, it is advisable not to intervene when low-productivity firms exit from the market to
improve the healthy competitiveness of the remaining firms as well as maintain productivity growth. The
state management agencies need to implement a number of measures for promoting industrial growth and
sustainable development such as selective FDI attraction, reputable investor selection and long-term projects
to not only increase the amount of investment capital but also protect young domestic industries. The tax
reduction is necessary to increase investment, improve the level of competition in the industry and encourage
new firms to enter the market and at the same time force surviving firms in the market for innovation. In
order to exploit the advantages of the North Central and Central Coast where have lowest level of resource
misallocation among six geographical regions across the country, provinces need to promote cooperation
among localities in the region with aiming to create a consensus towards building an area with attractive
investment environment, healthy competition and branding for the whole region.
5.2.2 Solutions for manufacturing firms
Vietnamese manufacturing firms need to have policies to train workers to improve their skills as well
as help workers access to high technology quickly. Manufacturing firms need to more effectively restructure
and reallocate their capital focusing on technology research and development, thereby promoting firm size
growth and reducing the technology gap with effective firms in the industry. Manufacturing firms also need
to secure financial resources to expand production and improve their competitiveness as well as minimize
risks from external negative shocks. In addition, the level of capital for labor as well as the firm size need to
be increased for higher profit and competition with FDI firms. Collaboration with foregin suppliers and
customers should be selective because in the negative conditions, foreign firms with technological
advantages and their parent companies in foreign countries may affect the entry and profit of local firms.
Low-tech firms also need to restructure and reallocate capital more effectively focusing on technology
research and development to compete with medium-tech and high-tech companies.

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CONCLUSION
The above estimation results show that the thesis has achieved five important points. Firstly, the
level of resource misallocation in Vietnam manufacturing firms tends to increase over time and TFP will be
increased by 81.2% if there is no misallocation with the assumption of moving to "US efficiency”,
Secondly, the Central Highlands and Mekong River Delta are found to have the highest misallocation
of resources. Lowest misallocation of resources is found in North Central and Central Coast. State-owned
enterprises; low technology or small and medium enterprises have the highest level of resource misallocation
and the gains of TFP when eliminating misallocation. Meanwhile, the lowest level of resource misallocation
and gain in TFP are found by FDI firms and high technology firms.
Thirdly, by the dynamic productivity method of Olley-Pakes (1996), the study finds the contribution
of exiting, entering, and surviving firms to aggregate productivity change is positive during the research
period. In about 16 years from 2000 to 2015, reallocation of resources towards higher productivity firms
increases aggregate productivity from 38.117 to 73.286.
Fourthly, the study finds the effect of trade liberalization, financial barriers, industry concentration
and corruption control on misallocation of resources. Decreasing misallocation of resources also motivates
high-productivity firms to enter and survive in the market while requires low-productivity firms to exit
Finally, by using Heckman's two-step model, the research results show that the entering or exit
decision of firms and their profits are affected by many factors including misallocation of resources and
firm- and industry- level factors.
The results providing in the study open a new direction for research on misallocation and
reallocation of resources. This study finds that misallocation and reallocation of resources changes aggregate
productivity. In addition, misallocation of resources affecting reallocation of resources through firm’s
decision to enter or exit from the industry has not been studied so far. Although the study considers quite
comprehensively causes of misallocation, the research method only stops at decomposing misallocation of
resources through output and capital distortions. Meanwhile, the misallocation can be derived from many
different sources. The results of Heckman's selection model are only clarified on the sub-sample of stateowned enterprises and low-tech firms. Future studies, if addressing these shortcomings, will be a world-class
economic study about resource allocation and productivity growth.



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