Dissertation for the degree of Philosophy in economic: Knowledge sources as determinants of firm lever innovation in Vietnam – An empirical study

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The main objectives of this dissertation are: To review the literature on innovation and the determinants of innovation especially knowledge sources for innovation at firm level; to analyze the current situation of innovation of manufacturing firms in Vietnam; to identify the knowledge sources that manufacturing firms in Vietnam use for innovating and test the relationship between those knowledge sources and innovation outcome; to propose several solutions for manufacturing firms as well as policy makers in order to foster innovation in Vietnam based on empirical evidence.

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Nội dung Text: Dissertation for the degree of Philosophy in economic: Knowledge sources as determinants of firm lever innovation in Vietnam – An empirical study

MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMICS UNIVERSITY VIETNAM --------------------------------- Phùng Minh Thu Thủy KNOWLEDGE SOURCES AS DETERMINANTS OF FIRM LEVEL INNOVATION IN VIETNAM: AN EMPIRICAL STUDY DISSERTATION FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS HANOI – 2020
MINISTRY OF EDUCATION AND TRAINING NATIONAL ECONOMICS UNIVERSITY VIETNAM --------------------------------- Phùng Minh Thu Thủy KNOWLEDGE SOURCES AS DETERMINANTS OF FIRM LEVEL INNOVATION IN VIETNAM: AN EMPIRICAL STUDY Major: Economic Management Code: 9310110_QL DISSERTATION FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN ECONOMICS Scientific instructors: 1. Prof. Dr. TRẦN THỌ ĐẠT HANOI – 2020
i DECLARATION I have read and understood the violations of academic honesty, and I commit by my personal honor that this research is my own and does not violate the requirement of honesty in academic. Dissertation author Phùng Minh Thu Thủy
ii ACKNOWLEDGEMENT I would like to express my sincere appreciation and thanks to Professor Tran Tho Dat, for his regular provision of invaluable pieces of advice, guidance, correction, and encouragement to me throughout this research. I could not finish this PhD course without his supports and encouragements. I also like to extend my heartfelt thanks of gratitude to Professor Joris Knoben and Professor Patrick Vermeulen from Radboud university in The Netherlands, who guided me from my first step to set up this research and spent a countless amount of time to support me. This dissertation could not have been successfully accomplished without their contributions. Finally, I would like to dedicate this success to my beloved husband and lovely daughter, who all the time stay beside me. I would not be able to achieve this success without their continuous supports and great deal of understanding.
iii ABBREVIATIONS AND ACRONYMS ADB : Asian development bank EU : European Union Eurostat : European Statistical System GDP : Gross Domestic Product KBV : The Knowledge-based view OECD : Organization for Economic Co-operation and Development R&D : Research and Development RBV : The resources-based view SMEs : Small and Medium Enterprises SMEs : Small and Medium Enterprises The ES : The Enterprise Survey The ICS : The Innovation Capabilities Survey USD : United States Dollar
iv TABLE OF CONTENTS DECLARATION ....................................................................................................... i ACKNOWLEDGEMENT ....................................................................................... ii ABBREVIATIONS AND ACRONYMS ............................................................... iii LIST OF TABLES .................................................................................................. vi LIST OF FIGURES ............................................................................................... vii TABLE OF CONTENTS ........................................................................................ iv CHAPTER 1: INTRODUCTION ............................................................................1 1.1. Background ..........................................................................................................1 1.2. Problem Statement ...............................................................................................4 1.3. Study Objective ....................................................................................................7 1.4. Study process .......................................................................................................7 1.5. Scope of Study .....................................................................................................8 1.6. Contribution of Study .........................................................................................11 1.7. Limitation of Study ............................................................................................11 1.8. Organization of the Dissertation ........................................................................12 CHAPTER 2: LITERATURE REVIEW ..............................................................13 2.1. Research on Innovation in the world .................................................................13 2.1.1. Ground theory research ............................................................................13 2.1.2. Determinant of innovation research .........................................................17 2.1.3. Product innovation research .....................................................................27 2.2. Research on Innovation in Vietnam ...................................................................30 CHAPTER 3: THEORY FRAMEWORK ............................................................39 3.1. Definition of Innovation .....................................................................................39 3.2. Types of Innovation ...........................................................................................41 3.3. Determinants of Innovation................................................................................44 3.3.1. Following Resources Based view theory .................................................44 3.3.2. Following Knowledge based view theory ................................................46 3.3.3. Conclusion ................................................................................................47 3.4. Knowledge sources ............................................................................................48 3.4.1. Internal Knowledge Sources.....................................................................49
v 3.4.2. Collaborative Knowledge Sources ...........................................................49 3.4.3. Regional Knowledge Sources...................................................................50 3.5. Hypotheses .........................................................................................................50 3.5.1. Internal knowledge sources ......................................................................50 3.5.2. Collaborative knowledge sources .............................................................52 3.5.3. Regional knowledge sources ....................................................................54 3.6. Research model ..................................................................................................55 CHAPTER 4: METHODOLOGY AND DATA COLLECTION ......................60 4.1. Research context ................................................................................................60 4.2. Methodology approach.......................................................................................69 4.2.1. Logistic regression ....................................................................................69 4.2.2. Innovation research used logit regression ................................................70 4.3. Data collection ...................................................................................................71 4.4. Variables ............................................................................................................75 CHAPTER 5: RESEARCH RESULTS ................................................................81 5.1. General description of the ES and ICS sample ..................................................81 5.1.1. Distribution of firms by sector and region ...............................................81 5.1.2 Descriptive statistics ..................................................................................84 5.1.3. Innovation .................................................................................................85 5.2. Descriptive statistics of the sample merged from ES and ICS ..........................92 5.3. Knowledge Sources and Product Innovation .....................................................93 CHAPTER 6: CONCLUSION AND RECOMMENDATION .........................101 6.1. Conclusion........................................................................................................101 6.2. Recommendation..............................................................................................105 6.2.1. Policy recommendation ..........................................................................105 6.2.2. Recommendation for firms .....................................................................109 6.3. Limitations of the research ...............................................................................112 LIST OF RESEARCH BY THE AUTHOR REFERENCES APPENDIX
vi LIST OF TABLES Table 2.1: List of innovation models .......................................................................15 Table 2.2: List of main innovation research categorized by theory .........................27 Table 3.1: Firms resources ........................................................................................45 Table 4.1: Key Policy Documents related to innovation in Vietnam .......................64 Table 4.2: Variable measurement .............................................................................78 Table 5.1: Distribution of firms by region ................................................................81 Table 5.2: Distribution of firms by sector and region ...............................................83 Table 5.3: Distribution of firms by size and region ..................................................84 Table 5.4: Descriptive statistics ................................................................................85 Table 5.5: Product Innovation ...................................................................................86 Table 5.6: Product Innovation orientation ................................................................87 Table 5.7: Objectives of product innovation .............................................................88 Table 5.8: Innovation activities .................................................................................89 Table 5.9: Sources of information for innovation .....................................................90 Table 5.10: Barriers to innovation ............................................................................91 Table 5.11: Descriptive statistics and correlations....................................................93 Table 5.12: Logistic Regression Result of the baseline model .................................94 Table 5.13: Logistic Regression Results of each individual knowledge source models ...95 Table 5.14: Logistic Regression Results of the all independent variables simultaneously model ..............................................................................97 Table 5.15: Robustness tests ....................................................................................99
vii LIST OF FIGURES Figure 2.1 Research model in Nguyen Van Thang et al. study ................................34 Figure 3.1: Research model with all the variables ....................................................59 Figure 4.1. Distribution of the realized sample by region ........................................74 Figure 5.1: Product innovation and using knowledge sources from the supply chain......100
1 CHAPTER 1: INTRODUCTION 1.1. Background There is no doubt about the advantages that innovation can bring to a nation. OECD (2007) reported strong evidence for a positive relationship between innovation and national competitiveness. Innovation plays an essential role in economic growth and is an indispensable factor to contribute to creating more jobs. More broadly, both past theory and practice suggest that countries will follow different development trajectories, depending on their ability to identify and capture technological progress. Applying new technology translates technological and scientific advances into more productive economic activity. As such, it is not surprising that many OECD member countries have adopted national strategies to boost innovation and enhance their economic performance though increased productivity and growth. The vital role of innovation is not only affirmed in OECD countries but also developing countries OECD (2012). There is a plethora of reasons why innovation is important for developing and emerging countries (OECD, 2012). For example, innovation in agriculture plays an important role in reducing poverty and promoting economic growth. Other advantages that innovation can bring to those countries are creating more jobs, improving welfare, access to business opportunities, reaching the world technological frontier in many industries, and especially having the way to avoid “middle income traps”. The Asian development bank (ADB) (2014) states that countries fall into the middle-income trap if they are unable to move from a low-cost to a high-value economy, making it difficult for them to compete with both low-income and high- income countries. The ADB (2014) also stresses the vital role of innovation to avoid the middle-income trap as it raises productivity and promotes structural change. The ADB (2014) mentions Vietnam is a lower-middle-income country, which needs to increase the productivity of capital, land and other resources to avoid falling into the middle-income trap as well. Eric Sidgwick, Country Director of ADB in Vietnam,
2 said it was too early to say whether Vietnam was trapped in the middle-income trap, but the country needed policies to create higher incomes and increase labor productivity. Recently, some emerging economies have become significant actors in the global innovation system. Given the importance of innovation for economic growth, it is of utmost importance to understand the determinants of successful innovation. In order to gain that understanding innovation needs to be studied at the level at which it is generated, namely the firm level. At firm level, the ability to innovate leads to the wealth generation capacity. Innovations reduce production cost and improve quality of firms’ goods and services. Numerous empirical studies suggest that innovation enhances firm performance because the product of innovation increases firm competitiveness and the process of innovation transforms a firm’s internal capabilities making it more adaptive to change (Neely & Hii, 1998). De Jong and Brouwer (1999) confirmed the same idea in their empirical research with small and medium enterprises (SMEs). Those SMEs work in an environment of changing consumer preferences, increasing competition and changing technological requirements, in order to achieve business goals such as profit and growth, having a continuous flow of successful innovations is crucial for them. They build their competitiveness position by offering high quality products and services that match their customers’ demand, so they need a permanent flow of innovations. As mentioned above, there are plentiful studies on innovations. However, only a limited number of studies are conducted in developing countries especially in the case of Vietnam. Vietnam has been known as a poor country that suffered many wars along its history. In 1975, Vietnam became independent, but the economy was in an atrocious condition. The first five - year plan mission was to build a technical infrastructure and form a new economy that could improve people’s lives. However, the economy was not improved significantly and after two five – year plans it fell into
3 crisis. From 1975 to 1985, Vietnam had low economic growth with an annual increase of 4.6% and domestic production did not meet demand (Nguyen Quang Ngoc, 2006). In 1986, the Vietnamese Government started “Doi Moi” period to change the situation. After more than 20 years of economic reform, changing from a centrally planned economy into the market economy, Vietnam has undergone significant economic growth and become a lower ‘middle-income’ country in 2010. Vietnam has been one of the fastest growing countries in the past 20 years, but in terms of "development quality", it has not been achieved like other countries such as Korea, India or China. According to Nguyen Xuan Thanh from Fulbright University in Vietnam, the country can develop more only thanks to technology enterprises although this journey may last for decades more. Notwithstanding, the Government of Vietnam has set a target, namely, to become a middle-income industrialized country by 2020. To achieve this ambitious goal, there is a need for a more effective application of science, technology and innovation in the economy in order to drive productivity growth and diversification in production (Nguyen Anh, Nguyen Mai, & Doan Hung, 2013) or in the other words, this is the time the country should pay attention to innovation. In lieu of the lack of research regarding innovation in developing countries, In Vietnam, there is a specific dearth of firm-level innovation studies (Nguyen Ngoc Anh, Nguyen Dinh Chuc & Nguyen Duc Nhat, 2011; Nguyen Ngoc Anh, Pham Quang Ngoc, Nguyen Dinh Chuc & Nguyen Duc Nhat, 2008; Nguyen Thi Phuong Linh, Nguyen Ke Nghia, Do Thi Dong, & Nguyen Thi Tuyet Mai, 2019). Moreover, firms are the dominant economic actors that drive innovation, and particularly the commercialization of innovations, it is necessary to have a study on innovation at the firm level. In addition, with innovation firms can develop and create more value for the nation such as creating jobs, improving welfare, access to business opportunities, reaching the world technological frontier which could bring social benefits for a country. Hence, there is a call for more innovation studies in Vietnam than ever before.
4 Previous studies have shown that some firms are more capable of developing innovations than others. This research attempts to understand the reason behind that and aims to fill in the gap in research in firm level innovation generally and contributes to literature regarding the significance of firm’s innovation determinants by deeply investigating the relationship between innovation and one of the key determinants – knowledge sources for innovation at firm level. By doing so, the author expects to provide empirical evidence for policy makers in Vietnam to foster innovation at macro level. 1.2. Problem Statement Innovation has received much attention over the last decades as it is considered as a source for economic development. Most studies conducted in this area focus on developed countries even though for (firms on) developing countries innovation also is of crucial importance in order to grow and become internationally competitive. However, the difference in stages of development can be a barrier when applying the outcomes of studies in developed countries and in developing countries. Moreover, most of these studies, also those done in Vietnam, are about understanding innovation process at the macro level and provided limited or out of date empirical evidence for policy makers. They predominantly focus on national innovation systems and government innovation policies. Researches on innovation in Vietnam begins from early 2000s, though, most of the examinations is about innovation in agriculture field (Chairatana & Sinh, 2003; Martin, Castella, Anh, Eguienta, & Hieu, 2004; Spielman & Kelemework, 2009; Van Linh, 2001). Recently, innovation studies are getting more attention in macro level and other fields as well (Nguyen Ngoc Anh et al., 2011; Nguyen Ngoc Thang et al., 2013; Phan Thi Thuc Anh, 2014. However, there is still very little evidence about what drives firm level innovation in countries like Vietnam. Therefore, this research includes firm level variables in order to analyze the relative importance of different resources that affect firm level innovation and access the capabilities of a firm to utilize these resources.
5 Moreover, it is necessary to understand determinants of innovation in Vietnam to provide empirical inputs for evidence-based policy makers. Innovation is important as firms with innovation normally develop very fast and hence create lots of job opportunity which we could consider as one of the social benefits for a country. The case of Vietnam is especially salient to analyze as it has changed from a central planning regime where the central government decided output targets and prices, domestic and international trade with bureaucratic controls to a more market- based economy since 1986. Thirty years after the enactment of Vietnam’s “Doi Moi” (renovation) policy in 1986, the country has increased economic liberalization and achieved structural reforms needed to modernize the economy and to produce more competitive, export-driven industries. State-owned enterprises now account for roughly 40% of GDP. Vietnam has enjoyed rapid economic growth, which has been among the fastest in the world, with a mean of 6.4 percent a year since 2000. Remarkably, it has been transformed from one of the poorest to a lower middle- income country (Cao Sinh Viet et al.,2016). With a population of almost 93 million people (GSO, 2018), Vietnam is a densely populated developing country with 34.6% of the population living in urban areas. Even though its poverty has declined significantly, the country is working to create jobs to meet the challenge of a labor force that is growing every year by more than one million people. As mention above, Vietnam is now dealing to escape the Middle-income trap which is the stage where an economy has overwhelmed the low-income threshold (below US $ 1,025/person) to grow into a middle-income country (US $ 1,025 - US $ 12,475/person), but stuck. At this level of income, it is impossible to continue to rise up to become a high-income country (over 12,475 USD/person). This trapping has factors such as: no longer has the advantage of cheap labor costs as low-income countries; There is also no advantage in terms of infrastructure, high level human resources and modern technology - technology like high-income countries. Vietnam has moved out of the low-income countries group since 2008 (based on GDP per capita in that year reaching USD
6 1,145/person). However, it is believed that Vietnam is still face to the risk of middle -income trap and the highly recommend solution is to rely on innovation and technology firms (Ngo Thang Loi, 2019). Although Vietnam does have firms and industries actively engaged in innovation, the overall innovation system is weak. Vietnam ranks eleventh out of twelve East Asian countries in terms of human resource capacity (3.79 out of 10) reported by OECD & The World Bank (2014). Firms in transition economies exhibit a number of striking differences with firms in developed countries, such as a lack of complete discretion to acquire and allocate resources and little knowledge and experience to compete in a competitive, market-based economy (Peng, 2000). Performing this research with empirical data in Vietnam, the author can evaluate factors that affect innovation in Vietnam and compare with advanced economies. This is in line with the Ministry of Science and Technology (MOST) of Vietnam as in recent year, they has identified firms as the center of innovation which could creative innovation, in which, attributing importance to technological innovation to increase productivity and competitiveness of enterprises and nation. In addition, Quintane et al.(2011) has stated that innovation is knowledge based outcome. In their research, they emphasized the vital role of knowledge as well as the source where the knowledge come from. Furthermore, our Party has determined since early 90’s Vietnam need to associate industrialization and modernization with the development of the knowledge-based economy, in which the whole country should "promote industrialization and modernization with the development of the knowledge-based economy and environmental protection." (Document of the 11th National Congress of the Communist Party of Vietnam). The party emphasized that technological development and knowledge related to that are really a fundamental driver of the process of rapid and sustainable development. Hence, study related to knowledge sources for innovation in Vietnam is really in critical need.
7 To sum up, there are four main reasons that the author would like to conduct this research. They are: (1) innovation related-knowledges are public goods and firms could benefit from diffusion these knowledge; (2) Majority of firms in Vietnam are small and medium size, i.e. they lack of resources for conducting innovation; (3) Social benefits could be improved if evidence-based industrial policies create better changes and assessing resources for firms which are pursuing innovation activities; (4) Good evidence-based policies grounds on understanding the determinants of innovation. 1.3. Study Objective The main objectives of this dissertation are: • To review the literature on innovation and the determinants of innovation especially knowledge sources for innovation at firm level. • To analyze the current situation of innovation of manufacturing firms in Vietnam • To identify the knowledge sources that manufacturing firms in Vietnam use for innovating and test the relationship between those knowledge sources and innovation outcome. • To propose several solutions for manufacturing firms as well as policy makers in order to foster innovation in Vietnam based on empirical evidence. 1.4. Study process This study was conducted with 6 steps as following: Step 1: Literature review: Review all related studies and summarize the result of those studies. Step 2: Theory framework structuring + Identify research questions + Identify all the variables + Identify possible hypotheses
8 Step 3: Designing questionnaire to interview firm managers on innovation at firm level. Step 4: Selecting database available to use secondary data This study use data from The World bank survey for innovation in Vietnam Step 5: Data analyzing using Excel and Stata This step conducted to test the hypotheses and analyze the impact of independent variables on dependent variable. Step 6: Dissertation composing Use the results from step 5 to compose this dissertation. 1.5. Scope of Study This study focuses on innovation in manufacturing firms in Vietnam. Manufacturing firms are considered as a basic economic unit, the cell of the national economy. At this level, product creation activities take place - providing these types of products - for social needs. The role of those firms in a market economy is undeniable. Manufacturing firms is usually seen as any firms use components, parts or raw materials to produce a finished product. It is defined by Kenton (2018) that firms which create or assemble finished goods for sale on a large scale. Those firms can utilize a quantity of methods, including human and engine labor, and biological and chemical progressions, to make raw materials into finished products by using tools. It is said that production or production of material wealth is a major activity of human economic activities. It is defined as the process of making a product for use, or for trade. The concept of manufacturing firms is those that use resources and production materials in combination with the application of science and technology to produce commodity products to meet market demand (Nguyen Le Thanh Tuyen, 2013).
9 The reason why the author focus on manufacturing firms is because Vietnam has increasingly turned into a manufacturing hotspot in Asia mostly with electronics, thanks to its comparatively large and low-cost labor force, constant political atmosphere, geographical advantages, attractive tax regime, and open trade policies from the government. Data in 2017 shows that manufacturing production increased 14.4% while the first two quarters of 2018 observed Vietnam’s ongoing manufacturing successful at 12.9% (BBGV, 2018). They also mentioned that Vietnam is having important advantages to encourage its industrial development including steady and substantial foreign direct investment stream and a youthful healthy and low-cost labor force. Multinational organizations attempt to find their way out of the reliance on China - the manufacturer of the world, hence countries in ASEAN are a good opportunity as they carry certain parallels. On the other hand, Vietnam is a country that does offer many competitive advantages contrast with other countries in ASEAN. One of the leading advantages is that Vietnam offer low minimum wages. (BBGV, 2018) reported that the widest minimum wage gap in 2018 between Vietnam and Thailand is roughly $50 per month. Correspondingly, manufacturing industries in Vietnam have been perceiving a remarkable growth. Moreover, Vietnamese policy makers understand the role of global integration, hence, they are welcoming international businesses, and attempting to give those firms the same opportunities as the local firms. If they have evidence from firm level, they could issue more appropriate policies in the future. Hence, this study aimed to provide policy makers in Vietnam data support related to this field. When mention determinants of innovation at manufacturing firms, literature shows studies on either or both exogenous and endogenous factors (Avermaete et al.,2004; De Jong & Vermeulen, 2006). However, the scope of this study is to focus on the impacts of knowledge sources for innovation, namely internal knowledge sources, external knowledge sources, and regional knowledge sources. The reason is
10 because innovation is a knowledge-based activity. It is explained by the knowledge- based view theory as the firm is assumed as an institution for integrating knowledge and knowledge performs vital role in production. This is also supported by the concept “knowledge-based economy”. This found back to the early 1960s of the last century, pioneered by Fritz Machlup and Peter Drucker. Over the past five decades, there has been much research to identify and explain the mechanism of this economy. In the past few years knowledge economy has been chosen as the development strategy of many countries, both developed and developing countries including Vietnam. In the knowledge economy, the main principles, ways and factors that govern economic activities are human knowledge. Other names such as knowledge-based economy or knowledge-driven economy give us a more intuitive understanding with emphasis on fundamental role and influence of knowledge in economics (Godin, 2006). The author would like to use product innovation as an indicator for innovation outcome as it is the highly familiar and commonly been used in manufacturing sector (OECD, 2018; OECD/Eurostat, 2005). Product innovation includes methods, techniques and processes to implement incremental improvements to existing products and services including making evolutionary changes to products that use existing technologies and organizational capabilities. Moreover, Cooper and Kleinschmidt (1987) declared that product innovation is especially needed for firms to compete with their counterparts in the same fields. Dougherty (1992) stated that the exercise of product innovation is envisioned of as the establishment and development of knowledge which connects market and technological opportunities. In addition, product innovation is considered as a key determinant of firms’ sustainable development in many recent studies (Danneels, 2002; Laursen, Masciarelli, & Prencipe, 2012). These indicators are selected as dependent variables to indicate the impacts during 2013-2016. This study focuses on firm-level data in Vietnam in
11 order to deliver critical evidence that complement macro data. The survey conducted by the World Bank in 2015-2016 dealing with 996 firms in Vietnam. Later, the author took 300 manufacturing firms to interview for the following innovation survey. There are some missing variables when merging the data and the study finalized with consists of 294 firms. Correspondents of the surveys located in four Vietnamese regions, which are the Red River Delta, North Central area and Central coastal, South East and the Mekong River Delta. 1.6. Contribution of Study This research analyses the impact of different knowledge sources of product innovation in Vietnam using firm-level data. Hence, it can help to answer the question that whether all kinds of knowledge sources have significant relationship with innovation or only specific one. Firms in Vietnam could base on that and decide who and where they should take knowledge from if they intend to do innovation. Secondly, this study could also be a good evidence for policy makers to understand the determinants of innovation especially the impact of knowledge sources for innovation. Innovation related knowledges are public foods and firms could benefit from the diffusion these knowledges. Moreover, while most firms in Vietnam are small and medium size, they could lack of resources for conducting innovation. To understand what could hinder innovation at firm level means we could provide grounds for new industrial policies and create social benefits for firms which pursuing innovation activities. 1.7. Limitation of Study This study has some limitations that the author would like to highlight. First, the data is based on information about innovation related activities of firms from 2013 to 2016. This issue cause difficulty to analyze firms’ innovativeness sustainability as well as evaluate the prior innovation history.