Optimum firm size in Vietnam: Does subcontracting matter?

Abstract

PurposeThis study investigates the optimum size for manufacturing firms and the impact of subcontracting on firms' likelihood of achieving their optimal scale in Vietnam.Design/methodology/approachUsing data from the enterprise census in 2017 and 2021, the paper first estimates the production function to identify the optimum firm size for manufacturing firms and then applies the logit model to investigate factors associated with the optimal firm size.FindingsThe study reveals that medium-sized firms exhibit the highest level of productivity. Nevertheless, a consistent trend emerges, indicating that nearly 90% of manufacturing firms in Vietnam operated below their optimal scale in both 2017 and 2021. An analysis of the impact of subcontracting on firms' likelihood to achieve their optimal scale emphasizes its crucial role, especially for foreign firms, exerting an influence nearly five times greater than that of the judiciary system.Practical implicationsThe paper's findings offer crucial policy implications, suggesting that initiatives aimed at enhancing the overall productivity of the manufacturing sector should prioritise facilitating contract arrangements to encourage firms to reach their optimal size. These insights are also valuable for other countries with comparable firm size distributions.Originality/valueThis paper provides the first empirical evidence on the relationship between firm size and productivity as well as the role of subcontracting in firms' ability to reach their optimal scale in a country with a right-skewed distribution of firm sizes.